An understanding of the motivation of issuers is fundamental in Capital Flow Analysis.

The U.S. bond market may be divided into four types of issuers, with this breakdown over the decade 1995-2004:

1. F209. Treasury Bonds (8.9% of bond issues);
2. F210. Agency Bonds (39.5% of bond issues);
3. F211. Municipal Bonds (6.9% of bond issues); and
4. F212. Corporate Bonds (44.7% of bond issues).

Each of these bond classes is governed by different parameters:

1. Primary Decision Maker: Who is it that makes the primary decision that results eventually in the issuance of these bonds?
2. Lag Between Decision and Issuance: How long is it between the time when the primary decision maker takes action that later results in these bonds being issued, and the actual issuance of the bonds?

3. Sensitivity to Interest Rates: How much is the primary decision maker influenced by current interest rates before taking the action that leads to the issuance of these bonds?

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Net issues of corporate and foreign bonds held steady during Q3 2005, thereby prolonging a three-year flat trend in corporate bond issuance.

(See Flow of Funds Table F212 Corporate and Foreign Bond.)

The failure of corporate bond issuance to increase with U.S. economic recovery explains, in part, the flatness of the bond yield curve. Although the Federal Reserve Board could manipulate short-term yields upwards, corporate issuers did not correspond by depressing prices of long-term bonds by increasing the supply of new bonds.

The graph shows a remarkable shift in the market for corporate bonds over the decade:

	Who Issues Corporate Bonds?

There has been a marked down-trend in the issuance of corporate bonds by nonfinancial corporate business since 1998, while there has been a counterbalancing explosion in the issuance of ABS bonds.

According to Federal Reserve Flow of Funds Table F208, Funding Corporations, followed by Money Market Mutual Funds, were the principal buyers of open market paper in Q3 2005. The main suppliers were issuers of asset-backed-securities and foreign financial institutions.

The graph shows variations in demand for open market paper in the U.S. over the last decade.

	Who Buys Open Market Paper?

The term “open market paper” refers to commercial paper and bankers acceptances with tenures of less than a year, issued by the private sector.

Over the decade, demand for open market paper grew steadily until 2000 when the stock market crashed and the country entered into recession. Between 2001 and 2003, sellers dominated the market, but after 2004, with economic recovery, the demand for open market paper has returned to pre-crash levels.

Funding corporations are financial entities associated with foreign banks or non-bank holding companies, and custodial accounts for reinvested collateral associated with securities lending operations.

For an explanation of developments in the market for these securities, see the article, “The evolution of the U.S. commercial paper market since 1980“, by Mitchell A. Post, published in the Federal Reserve Bulletin (Dec. 1992).