Home > Bonds > How big is the Bond Market? Believe me you will actually find this interesting!

How big is the Bond Market? Believe me you will actually find this interesting!

I looked previously at how much money is invested in the stock market.  This blog will the first on a series on the “boring bond market”.  The first question to ask is how big is the bond market?  Let’s look first at the Corporate Bond Market.  The total Corporate Bond market at the end of the 1st quarter of 2011 was $11.3 Trillion dollars.  As discussed in a previous blog, the total Stock Market for US Stocks was $17.7 Trillion Dollars and the total for all the Worlds Stock Markets was about $60 Trillion Dollars.  So, the total bond market is about 20% the size of the total stock market and about 60% of the US Stock Market.  So, if we once again try to get our hands around this Trillion Dollar number we will divide it by the 95.6 million families in the US, it would mean that each family on average owns $118,000 woth of bonds in their portfolio.  We will look at that like we did stocks in future blogs about who really owns bonds.

Americans own $$1.6 Trillion dollars of Foreign Debt and Foreigners own $2.4 Trillion of US Company Bonds.  This means Foreigners own more of our bonds than we own of theirs which is opposite of the what happens with stocks where we own more of their stocks than they own of ours.

The bonds we own by who the issuer of the bond was is shown below.

Not too surprising is that the biggest share of bonds we have are the one’s issued by Companies.  It is what you think of when you think of bonds.  The typcial AAA rated US Steel or Ford  bond.  The second biggest area is Asset Backed Securities bonds.  The Asset Backed Security (ABS) is a bond that is issued on top of some other debt.  The biggest of these Asset Backed Securities is one’s made from Mortgages.  In other words, a bank sells its’ mortgages that it has to a company that then put’s it together with a whole bunch of other Mortgages that were sold to it and then floats a bond for the value of all these mortgages.  This means that if you buy this ABS Bond you basically are holding a bunch of mortgages and you are receiving the payments made by homeowners in the form of dividends paid by the bond issuer.  This seems like a great idea, you become the bank in essence with homeowners sending their house payments to you.  It was a very fast growing area in Finance for a number of years.  It was also the biggest single reason for the Great Recession we just suffered through!

The problem was that banks started lending money for mortgages to people that couldn’t afford the house.  Then the Traditional Bank packaged these mortgages up and sold them to a Bond Issuer (usually an Investment Bank like Bear Stearns, Lehman Brothers & Goldman Sachs).  You may recognize these names as two of them recently collapsed and took down the stock market with them.  In any case, the traditional bank no longer had to worry about the fact that the homeowner was not going to pay their mortgages because they just had passed the liability on to the Investment Bank.  The Investment Bank then turned around and sold these ABSs to a number of people.  Most of these bonds were bought by companies like Insurance Companies who felt like this was a nice safe investment.  Some of these you may have heard of, like AIG,  because the US Government had to bail them out too.  When you hear the term “Toxic Assets” on a company’s books, the Asset Backed Security is the prime one.  Mostly individual investors did not invest in these horrible investments, but, were still hurt because pension funds, insurance companies, mutual funds, etc, did buy them, so, you and I ended up getting indirectly hurt as the value of these stocks we owned fell dramatically.

Bet when you decided to read this you boring blog about bonds, you wouldn’t find out that bonds were the cause of demise of the US Economy.  In any case for reasons that seem obvious now, the Asset Backed Security is not as popular as it used to be.  It still is out there in a big way however with about $2.2 Trillion Dollars invested in these type of bonds.  That is less than half as much as what it was in 2008 when the whole mess started and a lot of this is due to the bonds actually defaulting.

In summary, we own a lot of bonds, but, only about 60% of what we have invested in the stock market.  The bond market while “boring” can also be risky as evidenced by the Asset Backed Securites Bonds fiasco of the last decade.   Even with the decline in the fortunes of the ABS Bond, bond ownership has been steady as we invested money in traditional Corporate Bonds at the same rate money was lost money in Asset Backed Securities as evidenced by the following chart.  So, bonds are an important vehicle in an investment portfolio.  I will be discussing what a bond really is, who owns them, and what to expect from them in future blogs.  So, come back and “bond” with me in the next few blogs.

Categories: Bonds
  1. David
    August 3, 2011 at 7:36 pm


    I discovered your blog today and will regularly visit to read and learn. You are doing a fantastic job.


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