In the last blog post we discussed “the” market timing question, we are going to carry on with this theme, but in a different arena, and that is in the bond market. We are pleased to have had the opportunity to sit down for a Q&A with Alex Heron to explore this further.
Alex is Executive Vice President of National Sales and Business Development for PIMCO. He holds the Certified Financial Planner and Chartered Financial Analyst designations and, has been in the investment industry for twenty five years.
Colin and Steven: Alex, tell us your story. How did you end up where you are today?
Alex: I started back in 1996 before the last big crisis in 1999 that you would both remember so well. The Y2K, the tech bubble crack, all that kind of stuff that we've all seen over the years. You talked earlier about a lot of investors haven't seen volatility in the market if they graduated in 2009. Well, all three of us remember a lot of that volatility back in the day. I joined back in the 90s and about ten years ago, PIMCO actually reached out to me. They were looking to build their business here in Canada. I was always fascinated by the bond market. It's a very large market. It's an opaque market. It's a market where people need help. And so I was drawn to PIMCO and I joined back then and it's been a great ride for most of the last decade.
Colin and Steven: Tell us how the bond market works in terms of trades and what the magnitude of the bond market is globally?
Alex: I think a lot of people probably are not as familiar with the bond market as they are with the equity market. They all can bring out their smartphones and see, for example, the share price for Apple in real time, but they do not really know how that works in the bond market. So to put it in perspective, the bond market is very large, it's about one hundred and ten trillion. US stock market is somewhere around half that size. So it's very big even relative to the large stock market. It also doesn't trade like stocks do. It doesn't have a transparent market like the stock market does. It trades more by appointment where large dealers can contact each other and transact with each other and trade large lots of bonds. The other thing to think about with the bond market, it's not a perpetual market like the stock market. And what I mean by that is when a new stock gets created and it does an initial public offering or an IPO, that stock is going to be around for a long time, potentially forever if it doesn't get bored or go bankrupt, whereas a bond on average only lasts about five years. If you think about it, every year in the bond market, roughly 20% of the entire market is being newly issued. That creates a very different market where the percentage of new issuances is much higher than that of the stock market. So if you're a large investor, like a PIMCO or CIBC or other big investors out there, you can go out and access some of these newly issued bonds. It's much more difficult to do that as an individual investor.
Colin and Steven: when PIMCO does a trade with someone, what's the typical size that a bond might trade hands at?
Alex: That's a good question. Can really depend if it's a new issuance. Sometimes we could be taking down billions at a time. So it's a significant amount. Obviously, if it's a simple trade of an existing bond, it might be in the millions. But these are not kind of retail investors trading a thousand dollars at a time here. These tend to be significant positions, typically in the millions or potentially even billions.
Colin and Steven: Well, that actually leads into one of our other questions, what is the difference between access in terms of bonds to retail investors versus institutional investors?
Alex: That's a good question as well. And that's really changed over time. You guys have both been in the business a long time, 15, 20 years ago, it was a lot easier for an individual investor to access bonds themselves. And one of the outcomes of that great financial crisis in 2008 was that banks and dealers were much more regulated. And so they then essentially got out of the individual bond game. It used to be they would keep hundreds of billions of dollars in inventory of individual bonds for their retail brokers like yourselves. And you could access those individual bonds. But due to regulations coming out of 2008, they are just really not doing that anymore. So it becomes much more difficult for individual investors to access bonds. And it's typically the institutions that kind of get first pick of these new issuances that come to the market. And I'll give you an example; there was one recently that PIMCO participated in, and because interest rates are lower today, there is a huge demand for yield. Huge demand for newly issued, especially corporate bonds, and this bond that we participated in was ten times oversubscribed, meaning investors wanted ten times more than was actually even available. And that's at the institutional level. So an individual retail investor is not likely to get access to something like that.
For more questions and answers with Alex Heron please refer to our Podcast.
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