In my last Blog post, I discussed how the search for income in a low interest rate environment sparked flows into high yield bonds, and how this segment has seen a sell-off in recent months. Looking at the corporate bond market over the past few years, we see that there has been a growing demand for both investment grade and high yield corporate bonds. This rise in demand has been met by a substantial increase in the size of the corporate bond market.
Corporate Debt Offerings on the Rise
As my colleague Russ Koesterich mentions in a recent Blog post, deleveraging has taken place in the financial sector, but other segments have continued to grow and issue more debt. Over the past six quarters, corporate debt has been growing at an average annualized rate of around 9.5%, which exceeds the pre-financial crisis average of 7.5%. The U.S. investment grade credit bond market is now $5 trillion, with double the number of bonds available on the market from 10 years ago. Similarly, the high yield bond market is around $1.3 trillion, with 1.3 times more bonds over the same period, as illustrated below. More offerings in this space provide greater opportunities for investors to create diversified portfolios and get access to bonds across a range of sectors and credit qualities.
Source: Bloomberg as of 8/11/14
To take advantage of the low interest rate environment, corporations have not just been issuing more bonds, but longer maturity bonds as well, allowing them to lock in low rates of funding for extended periods. As a result, the weighted average duration of new investment grade issues has been 7.71 this year compared to 6.38 last year.