Who's Buying Corporate Bonds, And Why Did The Household Sector, Contrary To Expectations, End Up Dumping $130 Billion In Bonds In Q3?

Tyler Durden's picture

That is the question BofA's Hans Mikkelsen tries to answer looking at last week's Z.1 statement. It is well known by now that the biggest beneficiary of the persistent equity outflows have been inflows into corporate bonds, primarily of the Investment Grade variety, as investors continue to distrust the equity markets. Yet to its surprise, BofA finds that the biggest source of capital for corporate and foreign bonds was not the household sector, but rather commercial banks, and specifically foreign banking offices. As to the "household" sector, which is the key place where retail is traditionally hidden, due to its status as a placeholder plug: it was the biggest seller of corporate bonds selling an annualized $541 billion of paper in Q3. How this number makes any sense in light of all the other data we have been getting recently is yet to be explained. Yet was is even more surprising is that corporate stocks, which ended Q3 about 10% higher than at the start of the quarter, saw net sales of over $80 billion annualized... How that led to an increase in prevailing prices is a riddle, wrapped in mystery, contained inside the Fed's ES/SPY purchasing JV with Citadel.

More from BofA:

Commercial banks emerged as the biggest (by far) net purchaser of US corporate and foreign bonds in Q3, according to Fed Flow of Funds data. Within commercial banks, foreign banking offices in the US accounted for the bulk of purchases ($440bn annualized, or roughly $110bn during Q3) while bank holding companies purchased the rest. We doubt that foreign banks were this active in corporate bonds and conjecture that a good portion of these purchases took place in foreign assets such as (non-US) US$ sovereign and supranationals (these are included in the category “corporate and foreign bonds”), where net issuance spiked in September. Mutual funds and life insurance companies continued to accumulate significant amounts of corporate and foreign bonds while Households, funding corporations and money market funds were the biggest sellers. Life insurance companies stepped up their purchases of corporate and foreign bonds significantly in Q3 while reducing their purchases of equities. Mutual funds significantly increased their purchases of all debt asset classes in Q3 while Pension funds continued a relatively unchanged strategy of purchasing mainly Treasuries and some corporate and foreign bonds while selling equities and agencies.

And an analysis of who bought what by type of buyer:

Life Insurance Companies:

Mutual Funds:

and Pension Funds, which it appears are once again the clear "winners" in the latest Treasury rout:

And as an aside, on an annualized basis, the three above combined sold far more corporate equities than they bought. So it must have been that good old household sector buying right? Wrong - "households" sold over $200 billion corporate equities annualized in Q3. So there you have it again - everyone was selling, yet equities magically levitated up starting with Bernanke's Woods Hole speech. So aside from the fact that even the government admits there was a global net selling in stocks (just over $20 billion) in Q3, the market somehow levitated to close about 10% higher in Q3. Here's a hint: ETFs, that lovely CDO^2 product for Gen Z which creates it own lovely feedback loop dynamic, ended up buying $133 billion in equities annualized. Ergo: nothing but a momentum driven market, in which everyone took the change to dump their holdings, leaving synthetic products and HFTs as the latest bagholder.

For all this and many more hilarious equity market observations, we urge readers to take a look at pages L.213 and F.213 in the latest Z.1.

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Quinvarius's picture

I think people are just selling everything because they have no choice.

revenue_anticipation_believer's picture

no choice....yes, pension funds, mutual funds, insurance companies HAVE to buy....GOING CASH IS JUST NOT DONE..it is thought that 2% is better than 0% i guess, yet KNOWING that a 2% bond issue at PAR, would in a 20% environment of inflation...could 'haircut' down to 10% of PAR in the secondary market...still paying the SAME cash interest amount, but that cash had better LOOK LIKE above 20% of the price paid for the bond - discounted downward 10 times...    

i'd guess a lot of 'market opportunity' results from 'because they had no choice, at the time'


IQ 145's picture

 speaking of people making a choice; the Kitco 24hr. live Silver chart is very interesting right now; Hong Kong has opened and it demonstrates the nature of a bull market; people buy the dips; repeatedly and relentlessly.

midtowng's picture

That's what I think too. The retail investor keeps selling because they have to cash in their 401k and IRA to live on.

ebworthen's picture

Yup, converting it to silver / gold coinage because they know the taxman will cometh after thine IRA and 401K ere long, or simply cashing them out to pay down the mortgage and credit card now (or health insurance premiums).

If the skull had eyeballs he'd be eyeballing the cleavage below.

TexDenim's picture

Wow, incredible reading! We are on the verge of an equity collapse of historical proportions.

Gordon Freeman's picture

Good God--no shit!  OK, Tex, where's the pic?

Biggus Dickus Jr.'s picture

wow are you a girl?  I'm in love!

revenue_anticipation_believer's picture

i did not know this backdrop, net selling of equities in amount of $80 billion? I know about the consistent 'insider' sales ......AND this is NOT explained by the growth of ETF's and index funds?

And meanwhile the hunger for historically low premium bonds/equivalents..?

Now, PIMCO, we know is buying deep discounted MBS as a strategy...NOT PAR...yes, for instance 'notational PAR values' @ 6%,   they are buying bundled MBS i would guess at 'worthless'  25% ??? what price for the 'low tier' MBS ??  anyway that amounts to 24% rate of return from the income stream (if actually paid, in full)  and CAPITAL GAINS of perhaps doubleas these MBS are seen, IN THE FUTURE, as more valueable, by far to MR. MARKET

could be clever PIMCO  very very clever way to work with bond-like issues...


spinone's picture

Because the official numbers are bullshit.  They aren't painting the tape, they're printing it.

mikla's picture

Because the official numbers are bullshit.


This is actually very difficult for most people (e.g., the "layman") to understand:  Data collection is difficult and messy, even when you're attempting to be honest.

If you're not working *very hard* to be honest, then data collection, its use, and your conclusions, are useless at best, and dangerous-and-deadly at worst.

This affliction catches many people.  For example, if you are one of the silly that accepts the blind assertion that, "the stock market returns 10% on average, and the bond market 6% on average, over long periods", then I have only pity for you.  Check the data.  Neither is true.

You can use the numbers, but you must be very careful, and you should rarely trust them (you should *always* question them), and yes, I'm very sorry, this is often quite difficult to do.

[EDIT] Oh yeah, and I forgot to mention:  They (government agencies and the Fed) are currently lying their asses off (so don't trust *anything*).

DisparityFlux's picture

When my broker speaks, people hear beep, bleep, bleep, beep.

IQ 145's picture

 But "Merrill Lynch is bullish on America"; hmm. no wait, they went bankrupt.

Biggus Dickus Jr.'s picture

Could it be that people were locking in their gains unsure of their tax status in 2011?  That was when Boner briefly said he could compromise with Obama (meaning no tax break for 250,000 plus).  bond money is supposed to be the smart money.  We assume it's retail but it is just a placeholder.

Arius's picture

you might be an asset to CNBC...good spinning...talk to bob pisani

Biggus Dickus Jr.'s picture

thanks!  Being a corporate tool comes with some nice perks!

George Costanza's picture

Smart investors, whether they be institutions.... take slight moves up the risk ladder, leaving treasuries, going into corporates looking for more yield in what they hope is a less risky world situation.    Don't have to leave treasuries and go into Equities, there are incremental steps they are taking

Biggus Dickus Jr.'s picture

but they are leaving corporates?  and net sales of stocks at 80 billion annualized

essence's picture

I suspect many have less surplus to put into retirement funds of any sort.

While I can't speak for the masses... I have stopped contributions to my 401K.

It's just too risky, what with the offerings only being a choice between
stocks/bonds (considering the outlook for either). It's like choosing
between  democrats & republicians .....   either way you're screwed.





thepigman's picture

We know from Bernie Sanders that the Fed violated the Federal Reserve Act and accepted equities for loans during 2008-2009. Who's to say they don't do it constantly under some BS top secret emergency act we don't know about? POMO for equities that runs invisibly and parallel to POMO for Treasuries? I truly wouldn't put it past them.

tom's picture

A few likely sources of confusion:

- "corporate bonds" includes asset-backed securities.

- "households" includes hedge funds.

- "households" data is especially sloppy, as the Fed doesn't estimate it directly - it calculates it by subtracting all the other sectors' estimated numbers from the estimated total.

omi's picture

The conclusion is absur

"...synthetic products and HFTs as the latest bagholder."

Synthetic would mean that an ETF is made up of swaps on some index or a basket of swaps. Most ETFs actually hold stocks (so I guess you could call it cash in CDO lingo.)


And for f**k's sake, HFT, by definition doesn't hold anything by definition! HFT just looks to offload something earning a few pennies. 


But thanks for the laugh of the morning.

Spigot's picture

Let's assume for this exercise that "household" does not mean some poor SOB Joe and Jane 6Pk who are not making enough money to pay their mortgage. Probably these are not even modestly prosperous minions, since they would tend to patronize MF and other retail boutiques. Instead these are the wealthier who are in charge of their own accounts...who are dumping corp/muni bonds. Gee, I wonder what they have been reading that tells them its time to bail out??? (ZeroHedge, per chance?)

paragshah12's picture

Since interest rates are falling, premium bonds are seen as a safe way to invest and at the same time have the thrill of winning one of the over million and a half cash prizes awarded each month.