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Subject: Bonds

Bonds are any interest-bearing or discounted debt security that normally obliges the issuer to pay the bondholder a contracted sum of money and to repay the principal amount of the debt.

Q3 2005

Life insurers still favor bonds

Life Insurers' Assets

Life insurance companies invest pension and life insurance reserves primarily in bonds, according to Federal Reserve Flow of Funds Table F 117 for Q3 2005. Although favoring agency securities and treasuries in 2002, life insurers quickly returned to their traditional investment behavior of buying mostly corporate bonds.

Since 1997, pension funds have become the principal business of life insurance companies, as indicated by the relative size of life insurance and pension funds reserves.

US Bond Market

Rate sensitivity and bond issuance

Interconnected markets

This article describes the factors that influence the four primary US bond markets: Treasuries, Agencies, Municipals, and Corporates.

The analysis indicates that a high percentage of the supply side of the bond market is opportunistic and sensitive to interest rates, which explains why long-term interest rates have been relatively stable, despite increasing demand.

This analysis also suggests that should the flow of funds from the trade deficit suddenly dry up, the first impact would be a rapid reduction in the size of the residential mortgage market, rather than a sharp increase in interest rates.

US Bond Market 1995-2004

Bond demand exceeds supply for a decade

Supply & Demand: US Bonds

Over the decade, 1995-2004, the demand for US bonds of all types has surpassed new bond issues in eight of the last ten years. This is the reason that bond prices have held firm, even in 2003, when net new issues reached almost $1.8 trillion.

In most years, buyers had to go to the secondary market to get all the bonds they wanted. On the demand side, steady buying pressure, accounting for about two-thirds of the market, has come from foreign investors, insurance companies, federal, state, and local governments, and banks and savings institutions — each acting for difference reasons.

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2010-10-21 16:02