Bond Market Growth

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From the late 1980s to 2012, worldwide bond market values rose rapidly -- partly in response to the worldwide increase in prosperity over the same period. While the most explosive growth was in the smallest economies, bond markets increased in value substantially in developed economies as well. By 2012 the value of the U.S. bond market was nearly twice that of the U.S. stock market. By the middle of 2013, however, the U.S. bond market had sold off sharply, leaving investors wondering if the 30-year bull market and bonds was coming to an end.

Global Bond Market Growth

In 1980, the U.S. bond market stood at $2.54 trillion. By 1990 it had grown to $7.66 trillion, and by the second quarter of 2012 totaled $37.46 trillion -- about 15 times greater than the 1980 total. Despite this rapid expansion, the U.S. share of the world bond market has steadily diminished. A 2012 Morgan Stanley study notes that in 1989, the U.S. bond market comprised 44 percent of the world market; in 1999 it comprised 42 percent; by 2011 it comprised only 32 percent.

Emerging Markets

Bond markets have grown worldwide from 1989 to 2011, but the most dramatic growth has come in emerging economies, which now hold a little under a third of all bond instruments. The Morgan Stanley study concludes that the developed economies and emerging economies are on a path toward convergence, with about 65 percent of the annual growth in GDP (gross domestic product) in 2012 coming from emerging economies.

Changing Composition

Worldwide, sovereign debt (debt owed by government) has increased dramatically from 1989 to 2011 in almost every country except Canada. From 1989 to 2012 worldwide sovereign debt quadrupled, from $10.4 trillion to $43.7 trillion. For the same period, U.S. government debt also increased, although by less than the worldwide average. In 1993 U.S. government issues were 38 percent of global government issues. By 2011 it had shrunk to 27 percent. In the U.S. and the other G7 economies -- Canada, France, Germany, Italy, Japan and the U.K. -- the greatest increase in bond markets has been in mortgage-backed securities and their derivatives. Mortgage-backed securities are bond instruments holding real estate mortgages. Their derivatives include exotic financial instruments that hold title to other assets in addition to mortgages, such as CDOs (collateralized debt obligations) and synthetic CDOs. As New York Times financial columnist Gretchen Morgenson notes, because synthetic CDOs do not actually hold title to the assets named in the bond, they function more like bets than investments. Following the 2008-09 credit freeze in the U.S. markets, widely attributed to CDOs, synthetic CDOs and related debt instruments, the market for them momentarily collapsed. But, as a 2013 Wall Street Journal notes, they have returned.

The Future of the Bond Market

The Morgan Stanley study finds the increase in sovereign debt troubling, but is optimistic about the future of the world bond market generally. It points to the increasing stability of emerging economies, especially the BRIC economies (Brazil, Russia, India and China) as an indication that bond rates will continue trending downward as investors perceive reduced risk in world markets.