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moneysense.ca, 21/07/08
How large is the Canadian Bond Market?
The data on the size of the Canadian equity market is easily obtained – various sources suggest that it is roughly $2 trillion*. But the size of the bond market is a bit of a mystery. An article in The Province (thanks to Preet of Where Does all my Money go? for the sources in this post) says:
New investors are often surprised to learn the size of the bond market.
The Canadian secondary debt market is approximately 30 times greater than the total Canadian equity trading market.
Initially, I thought they were referring to the total value of Canadian bonds and was puzzled because one of the interesting ideas in The Intelligent Portfolio (Read Review) is the concept of a market portfolio, in which asset classes are held in proportion to their weighting in total world market value. According to the book, data provided by Financial Engines was used to estimate that the global market portfolio has a weighting of approximately 60 percent to 70 percent in equities and about 30 percent to 40 percent in bonds. In other words, the bond market is smaller than the total stock market value. Is there any reason to believe that the Canadian market is different?
Another source suggests that there is no reason to. In Triumph of the Optimists, the authors note that the total value of the Canadian bond market at start-2000 was $539 billion (data obtained from Merrill Lynch and World Bank) compared to the total stock market capitalization of $801 billion. It is very unlikely that the proportion has changed so dramatically since then.
A bit more reading clears up the mystery. A 1996 Government paper on Financial Transactions Taxes: Pros, Cons, Design Issues and Revenue Estimates, says: “At $3.6 trillion per year, the bond market in Canada is 13 times larger than the equity market”. The title of the paper clearly suggests that “size” refers to the total value of transactions, not the total value of assets.
It is not clear why the total value of transactions is of much relevance to an investor (other than the implication that the market is very liquid). But, the total value of the bond market is clearly important because it reveals the wisdom of the market – i.e. how investors as a group have allocated their portfolio between various asset classes.
The DEX Universe Bond Index tracks a market of investment grade bonds that totalled $645 billion in 2006. I wasn’t able to find a source for the total value of the Canadian bond market but I would venture to guess that it is between $1 trillion to $2 trillion. If you do know the size of the Canadian bond market (as measured by total market value), do let us know in the comments section.
* All dollar amounts in U.S. dollars.
moneysense.ca, 21/07/08
Thanks for the mention CC!
I have a hard time understanding why anyone would blindly hold asset classes in proportion to their weighting in total world market value. What if your short-term cash needs are greater or less than those of other people? If you’re planning to buy a house in two years, it’s crazy to have any of your down payment in stocks. If you’re in the enviable position of having a secure job paying you more than you need to spend, why would you hold the average amount of short-term bonds?
MJ: According to the book, the market portfolio is the “default” asset allocation for the *risky* portion of a portfolio. The downpayment for a home should not be part of the risky portion of the portfolio. For someone with a stable job, every penny they have belongs to the risky portion.
Having said that, the book does say that investors should construct portfolio that is more or less risky than the market portfolio depending on their circumstances, tolerance etc.
That’s interesting because the market portfolio includes the non-risky portion of everyone’s investments. This isn’t just a few personal down payments, but also the short-term cash needs of pension funds and mutual funds as well. So, if everyone followed the market portfolio advice, there would be a shift into fixed income. Then when everyone rebalanced again, there would be another shift. This would continue until we were all 100% in cash. Of course, this would never happen, but it is the logical conclusion of the market portfolio advice.
The allure of the market portfolio advice is compelling. You are advised to do the same thing as everyone else. This is comforting when you’re not sure what to do. However, this doesn’t mean that the advice is any good.
MJ: Yes, all the short-term cash positions are counted in the market portfolio and it add up to, if I recall correctly (I don’t have the book with me), 5%. But, in theory, if everyone allocates exactly like the market portfolio, it would only take one person selling one asset class to buy another and soon enough everyone hold that asset class and nothing else.
You’re also right that the market portfolio, as a “default”, may not be any good for an investor. It is a starting point in asset allocation considerations and the risk level should be adjusted after considering an investors personal situation.
Okay, this seemed to be a bit of a challenge, but I work in a library so I should be able to get some kind of an answer.
According to the World Bank, in 2005 the ratio of Private Bond Market Cap and Public Bond Market Cap to GDP were: 0.288219 0.537686 respectively.
Of note, the ratio for private has been steadily increasing and the public decreasing.
source: Thorsten Beck, Asli Demirgüç-Kunt and Ross Levine, (2000), “A New Database on Financial Development and Structure,” World Bank Economic Review 14, 597-605.
According to Statcan unadjusted actual dollar GDP for 2005 was 1,372,626 (millions).
Source: Statistics Canada. Table 380-0001 – Gross Domestic Product (GDP), income-based, quarterly (dollars x1,000,000)
So, this would give a values (millions):
Private Bond Market Cap (2005) = $395616.8931
Public Bond Market Cap (2005) = $738041.7834
Or roughly a total of 1.1 trillion dollars?
I’ll keep digging…..
Thanks Jon. $1.1 trillion sounds about right. That would make our bond market value roughly half that of the stock market and consistent with data in The Intelligent Portfolio.
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Comment on How large is the Canadian Bond Market?
Hi every one,
I would like just to confirm that the size of candian bond market is exactly $1,143 trillion as of december 2007 according to the Bank for International Settlements (BIS).
The BIS Quarterly Review reports the data of domestic debt securities, which are divided into domestic securities privately issued and those issued by the governments.
The $1,143 trillion includes:
Government bonds: $734 billion
Financial institutions: $276 billion
Corporate bonds: $132 billion
The size of the Canadian equity market is $2,186 trillion
Your conclusion is correct: the canadian bond market value is roughly half that of the stock market.
However, this is not exactly the case for the US.
As of december 2007
US bond market value: $24,7 trillion
US stock market value: $19,9 trillion
Please note that all these numbers are for domestic debt (i.e., do not include foreign debt, global debt, etc.)
I hope these informations are helpful.
Thanks