Bond issuance is huge, and constant, creating a flow of potential new investments for clients.
In a 58-page Market Trends report on corporate bonds, published at the end of 2020, the OECD said the global outstanding stock of non-financial corporate bonds reached an all-time high of $13.5trn (£11.37trn) in real terms.
The OECD report said: "This record amount is the result of an unprecedented build-up in corporate bond debt since 2008 and a further $2.1trn (£1.76trn) in borrowing by non-financial companies during 2019, in the wake of a return to more expansionary monetary policies early in the year."
The report stated that its focus wass on a dataset of "more than 92,000 unique corporate bond issues by non-financial companies from 114 countries between 2000 and 2019".
And then there are the billions of pounds worth of government bonds to consider.
It is worth talking about some of the language used in fixed income, which can be confusing to the ordinary client. For example:
- A bond could be called a coupon, an issue, corporate debt, company paper, a bill, certificates, credit, sovereign or fixed interest.
- You can be paid a yield, a coupon, interest, dividend or income. All of these generally mean the same thing but different fund groups might use different terminology, so it is worth clarifying that the consumer knows what their expected return would be.
- You have to know what a maturity date is and what the duration of a bond is – and these do not necessarily have to be the same as each other.
- There is the spread, which is effectively a bond’s yield relative to the yield of its benchmark/another bond with a different maturity.
Different types of bonds
There are all sorts of themes and variations, too: sovereign bonds, corporate bonds – investment grade and high-yield – green bonds and others. Government bonds have their own nicknames: UK government bonds are gilts; US Treasury bonds are T-bills.
Within the world of corporate bonds there are categories and sub-categories, such as Co-cos, Tier 1, Panda bonds, Junk bonds – a brief summary of some of these can be found in the info box below.
They can all have different yields, and the difference between the yield on a government, corporate (investment grade) and high-yield bond is known as the spread.
A Pimco spokesperson explains: "Typically, the yield on a bond issued by a company would be higher than the yield on a government bond of the same maturity, as governments tend to have better investment ratings than private businesses."
"The riskier the issuing company is perceived to be, the wider its bond yield spread will be relative to government bonds," the spokesperson adds.
This is why an investor might be lured by the potentially higher rate of return promised on a low-credit, high-yield bond despite the higher risk attached.
Because bonds have tended to perform differently to equities, they have been used to provide diversification.
The OECD stated: "In comparison with previous credit cycles, today's stock of outstanding corporate bonds has lower overall rating quality, higher payback requirements, longer maturities and inferior investor protection."
Not for nothing does Michael McEachern, co-head of public markets at Muzinich & Co, comment: "Bond investors must contend with inflation, the potential for recession and global macro uncertainties.
"At the end of the day, credit has an asymmetric risk-profile – that is either a company defaults or it pays par at maturity."