Mapping the corporate bond market

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The last decade has seen huge inflows into the corporate bond market from the largest and most sophisticated investors in the world and recent data sizes the corporate bond market at $11trn.

With corporate bonds now playing a central role in financing growth in the world economy, this asset class has become one of the most important in the world. This article aims to provide an overview of corporate bond markets across the major geographies: the United States, Europe, and the UK.

The Investors

Corporate bonds have long been the preserve of institutional investors with limited retail access. Typical buyers of corporate bonds include; pension funds, large asset managers, sovereign wealth funds, hedge funds, and high-net-worth individuals.

For a visual representation, the graph below breaks down euro-area corporate bondholders by investor type:

Source: European Central Bank Data, 2017

Euro-zone households account for only 5.2% of corporate bond ownership. MFIs (Monetary Financial Institutions), namely the European Central Bank, hold the bulk of corporate bonds. Overseas investors, non-domiciled investment houses and sovereign wealth funds (rest of the world), also own a considerable share.

The European experience is typical of the global corporate debt market. When compared to equity ownership, retail investors make up a relatively small share of the corporate bond market. For example, retail investors (households) hold 36% of US equities, below:

Source: Federal Reserve Board and Goldman Sachs Investment Research, 2016

The Borrowers

Issuance of corporate bonds varies by industry. Capital intensive industries tend to require debt financing to invest in big-ticket capital investment, such as building new plants. They will typically secure their borrowings on their assets in order to raise financing and reduce costs.

As such, Utilities, Industrials, and Communications comprise large segments of the corporate bond market. Of course, all companies need financing, and the corporate bond markets are broad, touching every sector of the global economy.

Source: Bloomberg

Issuers are often well-known names with healthy credit ratings. In the UK,the top 10 largest bond issuers are behind 20% of all issues. Companies include household names such as General Electric, HSBC, and GlaxoSmithKline.

Source: BofA Merrill Lynch indices, 2016

The bulk of the market is made up of large investment grade companies such as EDF and General Electric above. In addition, there are also a substantial array of high yield bonds available that provide more adventurous investors with the prospect of much higher returns. (Below)

Source: Bloomberg

The Dealers

Dealings in the corporate bond markets, particularly the high yield segment are very different from those in equity markets. Unlike equity markets, there is no stock market for bonds. Instead, deals are done directly (OTC) via email/chat interfaces or by phone between customers and dealers.

Buyers may “Request For Quote” seeking to pit multiple dealers against each other, this is known as “Competitive execution”. Alternatively, buyers may negotiate with individual brokers in back and forth exchanges.

The graphic above details a “Request for quote”

So how does WiseAlpha fit into the bond market map? WiseAlpha aggregates demand from our retail platform investors, and we deal directly with brokers at a wholesale, institutional size. Corporate bond trades of £250k are typically considered small while large deal sizes may stretch into the tens or hundreds of millions.

Institutional corporate bond dealers transact in sizes greater than £100k. The WiseAlpha market is the first digital bond market in the world to provide access to bonds in the institutional market in sizes as small as £100.

The Geography

Source: Dealogic 2018

Global corporate bond markets have exhibited strong growth in the last decade — almost tripling to $11trn. The largest markets are in the United States and Western Europe. The Chinese market, in particular, performed well, growing at 40% per year (compounded) over the last decade.

Parting Remarks

Corporate bonds finance every sector of our economies and every corner of the globe; from energy companies such as Centrica, to entertainment providers such as Netflix or luxury car manufacturers such as McClaren. Furthermore, a whole spectrum of bonds exists yielding between 3–15% or more, catering to a variety of risk appetites.

However, while both the size and scope of the corporate bond market has increased in the last decade, and many more stock exchange listed companies are tapping the corporate bond markets, retail investors remain excluded. We consider this to be the single biggest failure in financial markets.

Our mission is to liberalise and shape the corporate bond landscape by making it accessible to a broader investment audience.

Please remember that bonds are investments not savings or deposit protected products and your capital and interest is at risk.

Find out more about investing with WiseAlpha. All factual information true at the time of publishing.

As with all investments your capital is at risk. Invest via our Fractional Bonds.

See full Risk Statement.