Finalyst November 2013 Issue November 2013 | Page 14

FINALYST

NOVEMBER 2013

COVER STORY

CORPORATE BOND MARKET
In 1910, People used to sell bonds on used to sell at quick premiums. In- which separated the sheep from the
bicycle. Hard to believe but this is the deed, between 1880 and 1900, when goats- during depression, the yields
truth. The bonds were mostly second prime yields moved from 4 1/2 per- on sound medium-grade bonds, say
-grade 5 percent western public utili- cent to 3 1/8 percent, fortunes were A rated, rose from 5 percent to as
ty bonds and were usually priced at made by capitalists carrying big much as 15 percent (a price decline
par. Often the bonds cost that firm, blocks of such bonds on credit. They of perhaps 70 percent), while at the
the under-writer, something cost like were usually 100-year maturities and very same time prime corporate
ten points lower (plus some free non-callable.

bond yields declined from 4½ per-

stock), and so the young salesman on

cent to 2 3/4 percent. Most of those

bicycle, who operated on a 50-50
commission basis for every bond,
made 50$ for every bond he sold. In
those days one bond a week would
keep a man alive, three bonds a
week would be prosperity, ten bonds
a week would be affluence. And in
five years or so you could accumulate
enough capital to start your own
firm. The prime bonds, in the decade
ending in 1910, were the rails, like
the New York Central. Prime new
issues were also underwritten on a
negotiated basis, but these were
listed on the New York Stock Exchange, grabbed up by sophisticated

From 1923 to 1930 prime, long-term
bond yields were remarkably stable
at about 4 1/4 percent. Institutions,
however, liked round lots (in those
days this usually meant a hundred
bonds, occasionally $1 million), and it
was hard to buy such lots on the exchange except for a very few active

bond issues that had been distributed to the public in earlier decades
suffered one of four fates: they defaulted, or they lost caste and declined steeply, or if they did not lose
caste rose steeply in price, or they
were called callable.

issues - usually relatively new issues. In 1960s, 1970s institutions either
So institutions often waited for new ran out of funds or concentrated on
issues where they could buy in size. equities in which experience had
Also, American businesses obtain its been excellent. When bond yields
external financing primarily in the soared to 6 percent, 7 percent, 8 perover the counter market through cent and 9.35 percent, private and
underwritings of bond and stock is- miscellaneous investors returned to
sues or direct borrowing from institu- the bond market in size, at times taktions.

investors, and if well priced they
Now passing on to 1930s, a period

ing almost half of the total offered.
Those were the days of disintermedi14