A Corporate Bond Market Primer

According to a recent article in CFO, about $4 trillion in corporate debt was issued in 2012, besting the previous high of $3.89 trillion in 2009. But what may be more interesting in the article is a primer in the workings of the bond market. Before shelf registration was adopted in 1982, investment banks spent considerable time and effort premarketing bond offerings, essentially a road show for bonds sold in the primary market. After the advent of shelf registration, investment banks had less time for premarketing bonds so they essentially purchased an entire bond issue off the shelf and sold the bonds, taking all of the pricing risk of the new issue. Recently, investment banks appear to have gone back to premarketing bond issues. The downside to this model is that investment banks have reduced incentives to sell smaller, more complex bonds and instead focus on larger, regular bond offerings. Additionally, there appears to be evidence that the current method of using a syndicate to premarket bond offerings increases the yield premium on new bonds about 10 basis points higher than it should be.