In the last two posts I presented an overall Bond Market Overview and Size & Growth breakdown. In this article I will dig into the corporate bond sub-sector. I have always been more of a “stock guy” and have to admit that bond markets are much more difficult to analyze! It took some legwork to create the analyses below (thanks to our friends at Weitz Investments for helping with the data).
Here are some of the reasons bond holdings data is very hard to come by:
- There is usually one equity security per company (sometimes there are two share classes such as Alphabet/Google or Berkshire Hathaway).
- On the fixed income side, there can be dozens of distinct securities from one issuer. Some companies currently have over 50 bonds outstanding such as Duke Energy, AT&T and Citigroup.
- Many issuers have different credit ratings for various bond issues and some even split between Investment Grade and High Yield ratings. Here are some well-known examples of that: Bank of America, Citigroup, Charter Communications, Viacom, CenturyLink, CBS, American Airlines, and Noble Energy.
- Each bond issue has its own terms and covenants which might make it more or less valuable to investors.
- Then you have the complicated technical things like duration, convexity, call provisions, conversion features, etc. etc.. (but let’s not get into all that now).
So let’s start with the easy find – S&P 500 being the most popular stock index, Exhibit 1 looks at the other side of the balance sheet for those companies. As any Finance 101 textbook will tell you Financials, Utilities and Telecoms are highly leveraged. Technology, on other hand, disproportionately uses equity financing (also textbook). The equity size of the ledger at $21 trillion is over 5 times the size of the $4 trillion in bonds.
Exhibit 1 – S&P 500 Companies: Sector Weights for Stocks & Bonds (as of May 2017)
Now for the data that had to be analyzed, scrubbed and re-assembled from individual bond index holdings. Exhibit 2 looks at the broader U.S. Corporate Bond universe in both Investment Grade (IG) and High Yield (HY) parts of the market. Keep in mind that these indices include foreign companies issuing bond in the U.S. (e.g. Honda, BP, Sanofi) and private companies. The IG picture is fairly similar to the S&P bonds above. HY part, however, is quite a bit different. Junk bond issuers are concentrated in Consumer Cyclicals (casinos, retail, homebuilders), Communication Services (cable & junkier cell phone companies), and unsurprisingly Energy (E&Ps and drillers). It’s also worth noting that IG market is 4 times larger than HY accounting for 78% of overall corporate bond market size.
Exhibit 2 – Size and Sector Compositions of the U.S. Corporate Bond Market (as of May 2017)
Breaking it down further, Exhibit 3 shows all sectors and then top/bottom industries by % of their constituents’ debt rated as junk. “Worst” industries are concentrated in risky and VERY CYCLICAL businesses that go through frequent boom/bust periods . While “best” industries tend to be boring and steady as well as ones dominated by a handful of very large operators (banks, railroads, autos).
Exhibit 3 – % of Debt Rated as Junk By Sector/Industry (as of May 2017)
Exhibit 4 shows largest public American bond issuers (and also equity size for comparison). The trends noted in Exhibits 2 & 3 hold here as well – big strong companies on top and cyclical/leveraged ones on the bottom. Look at some of the Debt/Equity numbers for Frontier, Tenet, and Community Health! Note that these are only the “domestic bonds” issued by these companies. Some of them have tons of foreign debt as well (Apple’s Euro-denominated bonds)!
Exhibit 4 – Largest American Issuers of Corporate Debt
I’m not sure if there is any groundbreaking take-aways in this post. It was more of a curiosity and “why is this so hard to find!?” project for me. But Corporates is a very important (and relatively attractive) sector of the bond market, so learning a little more about it can’t be a bad thing.