Summary

• Nonfinancial corporates grew their stock of outstanding bonds by over 80 percent from Q4 2009 to Q4 2019,  moving from 21.80 percent of GDP in 2009 to 26.62 percent in Q4 2019
• Conversely,  the domestic financial sector continued to delever, reducing its bond debt by almost 14 percent since 2009, which reduced the banking system’s systemic risk going into the COVID crisis
• Foreigners are by far the largest holders of U.S. corporate bonds and, we suspect, the weakest hands and the most benefited from the recent Fed bond market bailouts

The Data

We look at the changes in level, profile, and ownership of the corporate bond market over two different periods with the Fed’s Flow of Funds data.

Conclusions/Data Inferences

1997 Q1 to 2007 Q4

1. The data illustrate the massive build in leverage in the domestic financial sector from 1999 to 2009, which was the primary cause of the GFC.
2. The stock of nonfinancial corporate bonds grew at a more modest CAGR at 4.1 percent during the same period, right in line with nominal GDP growth.
3. Foreign issues in the U.S. experienced significant growth though from a small base.
4. Overall corporate bond debt to GDP grew from 45.85 percent of GDP in 1999 to 64.57 percent by Q4 2019.

2009 Q4 to 2019 Q4

1. The U.S. domestic financial sector has been deleveraging since the GFC, reflected in the negative 14.3 percent growth rate in the sector’s bonds outstanding, which is one reason why the banking system was relatively strong going into the COVID crisis.
2. Conversely, nonfinancial corporates have grown their bond debt by over 80 percent to 41 percent of the corporate bond market and 26.62 percent of GDP, up from 21.80 percent in 2009.
3. Nonfinancial corporate bonds now make up the most significant percentage of corporate bonds outstanding in the U.S..
4. As we suspected in or January 2019 post, the diminished liquidity, or lack of traditional market makers, magnified the recent dislocation in the sector.  Though not on such a massive scale, the buildup in nonfinancial corporate bond debt since 2009 mirrored that of the financial industry from 1997 to 2007, and resulted in a similar dislocation

Who Owns The Corporate Bond Market

1. Foreign holders of U.S. corporate bonds make up the largest ownership group subjecting the market to capital flight risk.
2. Life insurance companies are the most significant domestic holders of corporate bonds, taking down almost 22 percent of the outstanding stock of corporates.
3. Mutual funds are a close third followed by households, which include hedge funds.
4. Other makeup over 20 percent of corporate bondholders but each group is less than 5 percent of the market. They include state and local employee pension funds, banks, state and local governments, broker-dealers, ETFs, closed-end funds, among others.
5. The largest hands – foreign holders – are most likely the weakest hands. Another risk that wasn’t on the radar of most traders and investors when the COVID crisis began.