Falling yields, a strong currency and a shrinking government bond market are set to boost new issue activity in the Eurosterling bond markets to record levels this year, according to estimates by Barclays Capital.

The bank, which last week launched a new benchmark bond index to reflect the growing importance of corporate issuance in the sterling sector, says that international borrowers will tap investors for anything up to £50bn (E80bn) this year. At this level, Eurosterling new issuance will grow to more than double 1997 levels, the bank said. The new index, which comprises more than 650 individual sterling Eurobonds, will still be weighted 65%:35% in favour of UK government bonds (gilts), but will more accurately reflect the determination among institutional investors to edge out along the credit curve in search of extra yield. William Lloyd, the former head of strategy at Barclays Capital in New York, has been drafted in to oversee the launch of a new group which will be responsible for marketing products based on the index. The group is expected to target pension fund consultants looking for new benchmarks which more accurately reflect the growing importance of the corporate sector in the sterling bond markets. "As in the Eurozone, sterling investors must recognise the trade-off between yields and credit quality to a greater extent and in a more closely defined manner than ever before. "With this index, we are giving investors the ability to reflect the new reality of the sterling bond markets,' Lloyd says. The switch from government bonds to corporate paper is particularly pronounced in the UK, where institutional investors are subject to controversial rules which require UK pension fund managers to more closely match their investments to their liabilities. The rules are forcing managers to gear up their weightings to longer-dated sterling bonds at a time when the Government has all but cancelled its funding activities through the markets. Economists have already warned that the Debt Management Office, which runs the gilts market on behalf of the Treasury, might launch just one conventional long-dated bond this year. Moreover, officials at the DMO have already conceded that, given its limited funding options, it will concentrate its efforts this year on redistributing liquidity from off-the-run stocks back into benchmark sectors of the yield curve, such as the 10- and 30-year sectors. That leaves the way wide open to the corporate sector to absorb pent-up demand along other parts of the yield curve, such as the three-, five- and seven-year sectors. Fast-food giant McDonald's last week joined a growing list of high-profile companies looking to establish benchmarks in the sector. In its first foray into sterling bonds for more than seven years, the company launched a 20-year deal, priced to yield 133bps over equivalent government bonds. Dealers said that, in yield terms, the firm was able to raise funds cheaper in sterling, than in its own currency. The deal comes hard on the heels of a £500m 36-year bond which household goods manufacturer Proctor & Gamble launched through JP Morgan earlier this month. The offering marked P&G's debut in the sector and prompted a number of institutional investors to bid for corporate paper for the first time. J Sainsbury, Royal Bank of Scotland and Agence Française de Développement are also understood to be lining up deals.