As shown in Federal Reserve Flow of Funds Table F212 (Corporate and Foreign Bonds), debt securities issued by financial sectors dominated the corporate bond market in Q3 2005.

Of the bonds sold by financial sectors in Q3 2005, 80% referred to asset-backed securities, which, in turn, were mainly related to home mortgages.

The graph shows how the bond market has changed over the decade. Bond issues of nonfinancial corporate business reached a peak in 2001, falling back by 2005 to levels of 1995.

As reported in the article, “Homes are America’s Piggybanks“, a large portion of home mortgage financing represents equity financing, with some of this financing not going towards real estate, but rather into other forms of liquid wealth such as time and savings deposits, mutual fund shares, money market fund shares, and agency bonds.

Over the decade 1996-2004, 48% of bonds issued the financial sector were related to asset-backed securities. However, the trend favoring asset-backed securities has grown rapidly since 1999, rising to 80% of bonds issued by the financial sector in Q3 2005.

The decline in bond issues by nonfinancial corporate business, combined with aggressive stock buybacks by this same sector (See “Corporations Slash Dividends, Boost Buybacks“), raises the question as to whether American business is making the capital investment needed to sustain long-term growth.

This entry was posted on Saturday, January 28th, 2006 at 12:34 pm and is filed under Corporate Bonds. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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