(FORTUNE Magazine) – After years as relative paupers in a land where Mary Meeker was queen, the bond guys are back this year--big time. That is what's supposed to happen in a recession, when declining interest rates make selling bonds (or taking out new mortgages) more attractive. But in a year so beset by tragedy and crisis, the record-breaking exuberance of bond markets has nonetheless been remarkable. "Ten years from now when financial academicians are looking back at this year, they're going to say what a truly stellar year it was for fixed-income markets," says Geoff Coley, co-head of global credit markets at Salomon Smith Barney.

First, the numbers: Even after tanking in November when hints of a possible economic recovery drove bond yields up and bond prices down, the Lehman Brothers aggregate bond market index was up 9.1% on the year, while the S&P 500 was down 13.4%. But the really big news is in bond issuance. In the U.S., corporations and government entities are on track to sell upwards of $4 trillion in medium- and long-term bonds this year, easily surpassing the record $3.5 trillion tallied in 1998 by the Bond Market Association. Records are being broken overseas as well.

Since equity issuance and merger activity are both down sharply, this bond boom has led to changes in Wall Street's pecking order--the main beneficiary being Coley's Salomon Smith Barney. By landing some of the year's biggest bond deals, the Citigroup subsidiary went from also-ran to, by one key measure (underwriting fees), leader of the pack. Admittedly, bond deals aren't as profitable as Internet IPOs: Salomon Smith Barney's $1.9 billion in disclosed debt and equity underwriting fees put it comfortably atop the industry rankings for the first nine months of 2001, according to Thomson Financial; at the same point last year, that amount would have been good only for fourth place behind Goldman ($2.5 billion), Credit Suisse First Boston ($2.1 billion), and Morgan Stanley ($2 billion). But still, while Goldman, Morgan Stanley, Credit Suisse First Boston, and Merrill Lynch are facing precipitous drops in profits, Salomon and other bond-heavy operations like Barclays Capital and Bank of America Securities are doing fine. And while stock analysts and M&A bankers are losing their jobs by the thousands, those on the bond side are actually dreaming of big bonuses in January.

"There are indications some people might still get paid," says John Winter, head of European debt capital markets at Barclays Capital in London. Actually, some may have already spent the money: In a year otherwise sadly devoid of tales of trader excess, six Barclays Capital employees made headlines in Britain in July by spending $60,000 on wine at a London restaurant (dinner was thrown in free).

The shift from IPOs to bond deals has also obviously had a big impact on who can raise money and who can't. Two years ago the important thing was to have a "story" that enticed equity investors to buy stock in your startup. Now cash flow is crucial, and even laggard blue-chip companies are able to build up multibillion-dollar war chests. An example: AT&T, despite all its troubles, was able to sell $10 billion in five-, ten-, and 30-year bonds in November.

That money isn't going into anything that will deliver an immediate stimulus to the economy (see "Will the Economy Get Well Soon?"). Instead, says Coley, corporations are issuing bonds to refinance debt at lower interest rates and for longer durations. Over time such refinancing does free up spending money for computers, factories, and sundries that spark the economy. As a result, the oft-voiced concerns that the Federal Reserve's interest rate cuts aren't working their way through the economy seem misplaced. Yes, the yield spreads between corporate bonds and (presumably risk-free) U.S. Treasury securities have remained abnormally high since the global financial scare of autumn 1998. But even with the added spread, interest rates on high-grade corporate bonds are still near their lowest levels in three decades--so it should be no surprise so many companies are issuing the things.

Even in the riskier reaches of the bond business, where rates are far from cheap, deals are still being made and markets are still functioning. It is this resilience in the face of terrorist attacks, emerging-market debt crises, and the biggest-ever corporate collapse that may be the bond markets' most important accomplishment in 2001.

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