Retail investors have been buying up corporate debt in record volume all year, and more banks and brokers are working to inform their clients about the bonds or turning to other companies for help in selling them.
LaSalle Bank NA, a Chicago subsidiary of ABN Amro Financial Services, said it had a surge this year in sales volume and in the number of banks and brokers willing to sell bonds to retail customers.
LaSalle, one of the top wholesalers of corporate bonds, said it sold nearly $4 billion of them through Direct Access Notes, its five-year-old new-issue bond wholesaling division, between January and early September; in the like period last year it sold $2.2 billion of the bonds. The sales have accelerated slightly since Sept. 11, with only a short drop-off just after the attacks, said Patrick Kelly, the managing director of LaSalles broker-dealer services division.
Strong retail interest in corporate bonds is unusual; retail investors generally buy them in the secondary market or buy bond mutual funds, Mr. Kelly said.
But the Bond Market Association said that in the first half of this year $509.5 billion of new corporate bonds were issued, up 45.3% from the first six months of 2000.
Many banking companies are noting the heightened investor interest. Jeff Gass, the senior vice president of fixed-income sales at First Union Securities Inc., a Richmond, Va., unit of Wachovia Corp., said interest in corporate bonds has been phenomenal. He said he expects it continue, and that investors will avoid equities for a while. Retail investors, if they get burned, have a long memory, he said.
Michael Segal, the vice president of fixed income at New Yorks Quick & Reilly, the brokerage subsidiary of FleetBoston Financial Corp., said that its retail corporate bond sales are up 10% to 15% this year. He said he expects the retail appetite for bonds to remain keen for the foreseeable future, but added that Quick & Reilly has no plans to hire more representatives, or emphasize bonds in its marketing.
Because of this heavier volume, some banks are starting to feature bonds more prominently in their advertisements and are trying to give investors and salespeople more information about corporate bonds.
Roberta Tucker, the director of fixed income at Cincinnatis Fifth Third Bancorp, said her companys brokers and advisers are spending more time explaining these products, since some investors may underestimate the risk. She said that corporate bonds even the highly-rated ones the banks brokerage sells still carry more risk than other fixed-income products.
Both Ms. Tucker and Mr. Segal said they have seen sales increase since Sept. 11.
Jim Fulp, the president of Raymond James Financial Inc.s third-party marketing division, which markets nonproprietary products through banks, said that commission revenue from bank sales of corporate bonds doubled between September 2000 and September 2001 compared with the previous 12 months. By comparison, over the same two years the St. Petersburg, Fla., companys government securities revenue rose 40%, and revenue from municipal bonds was flat.
LaSalle now has 369 banks and brokers selling the bonds it wholesales, compared with 100 in January, Mr. Kelly said. At least 61 of these customers are banks.
The company provides free training to its banks and brokerage clients that use its platform to sell bonds, Mr. Kelly said. The program helps them understand complex bonds so they can explain the risk to investors, he said.
Growth in retail corporate bond sales has also been aided by the efforts of banks and brokers to make it easier for retail investors to buy and understand these securities. This may help retail investors shake some of the doubts they have about corporate debt, which many associate with junk bonds and their massive losses, Mr. Kelly said.
Many companies now sell bonds online, either on their own or through trading platforms such as Valubond. With Internet sales has come more transparent pricing meaning investors can see what fees are being charged and what the yields are.
Individuals have not traditionally bought corporate bonds, and are confused as to how these things trade in the secondary market, Mr. Kelly said. As people become more familiar, they will get more comfortable.
John Ladensack, the senior vice president of fixed-income sales at Charles Schwab & Co., said Schwab has benefited from the boost in corporate bonds. Through August, he said, the San Francisco brokerage sold about $400 million of corporate bonds online to retail investors.
Mr. Fulp, however, predicted that enthusiasm for corporate debt will wane and that investors and their advisers will return to the equity market before long. More advisers will probably start pushing stocks to their clients, since the markets have fallen to the point where stocks and stock mutual funds are arguably a good deal again, he said.
Still, if stocks stay depressed and equity mutual funds continue to generate returns below historic averages which some expect banks and brokers will be selling a lot more corporate bonds to the retail market, Mr. Ladensack said.
Equity investors may ask, Why would I risk my capital to get another 3%? Mr. Ladensack said.
