The Corporate Bond Market

The Market Size

In the context of a historically low level of interest rates, linked to a decreasing trend in inflation as well as in budget deficits, the corporate bond market is rapidly developing and growing. This strong tendency affects both supply and demand. While corporate supply is expanding, in relation with bank disintermediation, corporate demand is rising as more and more investors accustomed to dealing with only government bonds are including corporate bonds in their portfolios so as to capture spread and generate performance. Within the four major bond markets in the world, the US Dollar (USD) corporate market is the most mature, followed by the Sterling (GBP) market and the Euro (EUR) market, the growth of the latter being reinforced by the launching of the Euro. The Japanese Yen (JPY) market differentiates itself from the others, because of the credit crunch situation and economic difficulties it has been facing since the

Asian crisis. Tables 1.4, 1.5, 1.6 and 1.7 hereafter give an appraisal of the corporate bond market size and weight for the four previous markets, as of September 2001 (source: Merrill Lynch, Master and Broad indices). The USD corporate bond market appears much bigger and also more diversified than the others: it is, for instance, more than twice as big as the Euro market, and low
investment-grade ratings are much more represented (over 80%).

The Sector Breakdown The corporate bond market can be divided into three main sectors: financial, industrial and utility. Figures 1.9, 1.10 and 1.11 hereafter show the breakdown of the US market into these sectors, and, furthermore, the breakdown of each sector into subsectors.4 Sources come from Merrill Lynch (Broad corporate indices as of September 2001).

Note that apart from the USD market, the financial sector is overrepresented. It is another proof
of the maturity of the USD market, where the industrial sector massively uses the market channel
in order to finance investment projects. It is also worth noting that the sector composition in the
USD market is far more homogeneous than in the other markets. For example, the banking sector is systematically predominant in the GBP, EUR and JPY financial markets (see the Appendix of this chapter), while the telecommunication sector exceeds one-third of the Euro industrial market. As a result, local credit portfolio diversification can be better achieved in the USD market than in the others.

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