The Capital Markets

CHAPTER 14Corporate Bonds

Marvin Loh

The corporate bond market is one of the largest bond markets in the world with approximately $8 trillion¹ in outstanding securities. The size of the corporate bond market has almost doubled over the past 10 years, making it the second fastest growing bond market in the United States, behind only the U.S. Treasury market, which is also the world's largest.² With average trading volumes of $20 billion per day, the corporate bond market has become an important investment option for bond buyers looking for better income opportunities than those offered in the Treasury market under the zero‐interest‐rate policy pursued by the Federal Reserve.³ Despite its size and economic performance, retail investors play a limited direct role in the corporate market, which remains dominated by institutional investors such as pension funds, insurance companies, mutual funds, and ETFs. While households own only an estimated 10% of outstanding corporate bonds directly,⁴ the biggest growth in ownership of corporate bonds over the past several years has come from the mutual fund and ETF communities, which is in effect a proxy for household interest in the asset class.

While the corporate bond market is considered the second largest bond market, it often trades like a much smaller market. By this we mean that there are a large number of outstanding individual bonds, which makes the average size per bond much smaller than the government bond market, which theoretically ...