Morgan Stanley and Goldman have bigger bond exposure than Bank of America and Citi

Bond underwriting exposure could be risky for investment banking departments, as interest rates begin to rise and refinancing slows.

Jonathan Casteleyn, CFA - Author

Nov. 20 2020, Updated 2:42 p.m. ET


Bond underwriting exposure could be risky for investment banking departments, as interest rates begin to rise and refinancing slows.

Investors generally have a good understanding of various aspects of the stock market, including the numerous eponymous stock indices, how to apply ratios to value a stock, and the differing sectors which make up the overall market. What is less understood, however, are the intricacies of the bigger and more complex bond market, which is made up of very different types of underlying assets. These assets usually pay coupons to investors and have either interest rate risk or reinvestment risk. The largest part of the bond market in the United States is still the U.S. Treasury market, followed closely by the corporate bond market and the mortgage bond market.

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The bond market

While the $17 trillion U.S. stock market is a more popular investment landscape for investors, the $37 trillion U.S. bond market is an important pool of securities for investors to understand in order to create a diversified portfolio. According to the Securities Industry and Financial Markets Association (SIFMA), the industry association for leading U.S. broker dealers, the bond market as of the most recent tally in 3Q 2012 is comprised of 3 major categories including U.S. Treasuries, corporate bonds, and mortgage related securities.


Treasuries represent the financing instruments of the U.S. government and most recently were the biggest category in the bond market, at 26% of total bonds outstanding or $10.7 trillion (over half the size of the U.S. stock market alone). Corporate bonds are the debt obligations of U.S. companies and were the second largest pool of fixed income at $8.5 trillion or 23% of the overall bond market. Mortgage related bonds are fixed income securities that hold underlying pools of mortgages and pay investors streams of interest and principal servicing as coupons. The mortgage bond market is of similar size to the corporate bond market with over $8.2 trillion outstanding or 22% of total. Smaller categories of fixed income include tax-free municipals (state and locally issued bonds) with $3.7 trillion outstanding, money markets funds at 6% of the market, and Federal agency bonds with $2.3 trillion outstanding. The smallest category in the bond market are asset backed bonds (ABS) which vary in their underlying assets held but generally include credit card receivables or auto loans that source coupons to investors. ABS bonds totaled $1.7 trillion in assets or 5% of the overall bond market.

US banks and bond issuers

While all the major U.S. banks have bond underwriting departments that help bond issuers underwrite (create) new bonds, it is Morgan Stanley (MS) and Goldman Sachs (GS) that source the most revenue from bond underwriting (as a % of total revenue), versus the bigger and more diversified operations of Citigroup (C) and Bank of America (BAC). Morgan Stanley sourced over 6.0% of total revenues in its 2012 operating period from fixed income underwriting followed by Goldman Sachs at 5.7%. Bigger and more diversified operations at Bank of America (BAC) and Citigroup (C) are also leading bond bankers, however with a larger revenue base, fixed income investment banking comprised a smaller 4.0% and 3.3%  of total revenue respectively at BAC and C.

The underwriting landscape can change quite dramatically year-to-year and it is a medium term trend that can effect investors in bank stocks as the refinancing wave slows down and interest rates rise.


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