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Who really owns bonds?

December 4, 2011 Leave a comment

This blog will try to characterize who owns bonds.  As identified in my last blog, the Total Corporate and Foreign Bond market as identified in the Federal Reserve Flow of Funds documents is $11.3 Trillion dollars.  It is mostly made up of traditional Corporate Bonds, Asset Backed Securities and Bonds issued by Commercial Banks or Bank Holding Companies.  The following chart shows who owns this $11.3 Trillion Dollars in Bonds:

The number one owner somewhat to my surprise isn’t Americans at all it, but is Foreign Investors.  This is followed by Insurance Companies.  Ownership of bonds by families is next either by owning individual bonds or through mutual funds (both at 15%).  So, the average family owns about 30% of the bond market.  For are mythical average American Family this would be about   $11.3 Trillion Total Bond Market * 30% Owned by Individuals / 95.6 Million Families = $36,000.  This $36.000 per Family would be evenly divided between individual bonds they owned ($18,000) and bond funds they had invested in ($18,000).

As we saw in earlier postings, you need to dig a little deeper to find out really what the average family owns.  For example, looking at the difference between average (mean) and median ownership.  Also, looking at the wealth of the people owning the bonds and their age would be interesting to know just like we did for stocks.  Digging back into the Survey  of Consumer Finances (SCF) Study by the Federal Reserve we can get a little bit of a deeper insight into who really owns bonds.  The first surprise is how few people actually hold bonds for how big the market is.  Direct bond ownership has been decreasing dramatically over the last few years as evidenced by the following chart:

So, if only about 1.5% of families actually own bonds directly and that means the average value of the bonds a family holding bonds would be $18,000 Direct Bond Ownership per all families / 1.5% families owning bonds = $1.2 Million.  In other words the average direct holder of bonds isn’t your average Joe or Jane, it is someone with a lot of money.  It looks like bond ownership is highly concentrated with the wealthy from this chart.  Looking into more statistics from the SCF Study they show the median value of families owning bonds to be much less than the mean or average ownership of about $1.2 Million.  Even though it is much less than the average (mean), it has been growing.  Again, this points out to concentration towards the higher end of the wealth bands.  The median was about $80,000 and growing in 2007.  It would be interesting to see what it is now, but, we must wait on the next SCF study released in 2012 for that.

As you would expect total bond holding is concentrated with the wealthiest 10% of families with the them holding over 50% of the total bond market in terms of value.  This is a little lower than the 60%+ they own of the stock market.  In terms of age, as you would expect, the older we get the more bonds we tend to own versus stocks with over 95% of bonds owned by people over 50.  That would make sense as a bond can provide income if you are retired and is considered to be less risky than stock market investing for those not willing to risk as much of their portfolio as they get near retirement.  We will look at the relative risk of stock versus bond ownership in a future blog.

In summary, bonds are not nearly as widely owned as stocks with only 1.5% of families owning bonds versus around 18% owning stocks.  Using medians as are measure of the individual typical investor, if you do own bonds you own about $80,000 worth of bonds versus the $107,000 worth of stock.  The SCF does not give us insight to the bond funds we own, but, I would hazard a guess that they are much more liberally sprinkled across stock ownership.  Remember the pooled investments (i.e. mutual funds and bond funds) were owned by about 12% of families.  The median value of these pooled funds per family was about $55,000 per year and has been consistently growing.  This means that a lot of families are not choosing to invest in individual stocks and bonds, but, instead are becoming “pooled” or fund investors.  Part of this is the growth of Exchange Traded Funds, as well as, traditional Mutual Funds.  While bonds are an important part of our economy not many people are directly invested in them.

Categories: Bonds, Uncategorized

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

July 30, 2011 1 comment

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