Investor love risk-free bonds, but is it possible to have so many of them?
If demand for an asset ballooned by 300% in a decade, then you might smell a bubble. This describes the rise of AAA-rated debt. In 1999, about $1.5 trillion AAA-rated securities were issued globally. In 2009, AAA-rated issuance peaked at over $6 trillion. Are we in bubble territory?
Check out the following chart from a report by the BIS and Basel Committee's joint forum:
Tracy Alloway at the Financial Times Alphaville blogs says that this could be the most important chart in the world right now. Is this a clear indication that the rating agencies and investors are both out of their minds? The chart shows two things. First, AAA-rated security issuance has grown at an extremely rapid pace over the past decade. Second, the portion of bonds that are AAA-rated has also grown significantly, to more than 50% of all fixed-income bonds issued, from around 20% in 1991.*
The 2009 Resurgence
The story through 2007 looks clear enough: asset-backed securities became very popular. Then they played a big role in the financial crisis and investors lost their taste for them. After AAA-rated bond issuance fell in 2007 and 2008, it jumped to a new high in 2009. This time, corporate and sovereign debt led the growth. Why did that happen? I can think of at least three possible explanations.