The Rise in Retail Bond Trading
Structural Developments in Bond Market Allowing for Greater Retail Adoption
Retail bonds are not exactly a new concept. In some countries, such as Italy for example, they have formed an integral part of investor’s portfolios for years. According to Bruegel, about one third of bank bonds in Italy are held by household retail investors, with preferable tax treatment of interest income on bonds.
To be clear, retail bonds are debt obligations issued by corporations to private investors rather than to banks and institutional investors.
This decade, a seismic shift in the make-up of bond trading activity has been taking place, with retail investors now grabbing a larger slice of the bond trading pie at the expense of governments and institutions, who typically dominate bond market trading volumes. Retail investors in the US now hold nearly 30 per cent of US corporate bonds.
In fact, according to an April 2024 report by Coalition Greenwich, retail investor interest in bonds is at a historic high. In Q4 2023, US households held $5.67 trillion in "directly held debt securities" (i.e. bonds and fixed-income securities). That is nearly a 90 per cent increase in what they held in bonds at the start of Q1 2021.
A major contributing factor to the heightened retail bond interest is the soaring inflation and subsequent policy interest rates across global markets this decade, with 10-year US Treasury yields hitting five per cent in October 2023 - their highest level in 16 years.
European retail bond trading also paints a similar picture.
As the chart below shows, retail fixed income investments have increased significantly across major European economies over the past five years;
UK: Volumes increased from €100 billion in 2019 to an estimated €300 billion in 2024.
Germany: Volumes rose from €80 billion in 2019 to an estimated €270 billion in 2024.
France: Volumes grew from €60 billion in 2019 to an estimated €230 billion in 2024.
With retail investors turning to bonds like never before, brokerages are assessing the best way to capture this interest. Broadly speaking, this is being done through democratising and fractionalising bond trading, with the introduction of structural and technological innovations that draws parallels to early equities trading. This includes lowering barriers to entry when it comes to bond investing and the proliferation of mobile applications and retail-friendly trading platforms.
The process of purchasing bonds differs from purchasing equities. Bonds are not usually traded on exchanges, meaning it is not as easy for retail investors to buy bonds compared to equities. Retail investors can buy bonds over-the-counter from the bond issuer (like buying Treasuries from the U.S. government-backed website TreasuryDirect). They can also buy Exchange-Traded Funds that hold bonds as underlying assets, or they can buy them through a financial institution that is registered as a bond broker. In addition, many specialised bond brokerages come with large minimum investment thresholds, with at least four-figure transactions/deposits (and beyond) typically required to purchase bonds.
However, accessibility to bond markets for retail investors is becoming easier, with several retail and specialist platforms now reducing barriers to entry.
This month, global neobank Revolut announced a partnership with fintech GTN to provide bond trading for European customers on its app, with a minimum investment threshold of just €100. Revolut currently allows trading of roughly 40 corporate and government bonds, and has plans to expand the amount of bonds available for trading in the coming months.
Another example is retail brokerage Public. It launched its first fractional bonds feature last month, allowing retail investors to gain more entry-points into the bond market by allowing customers to invest in $1 increments once they pass the $100 minimum investment mark.
In April 2024, online brokerage Interactive Brokers announced the launch of extended trading hours to enhance its existing bond trading offering, allowing customers to trade Treasuries and corporate bonds for 22 hours a day, five days a week.
There is no doubt that the bond market is ripe and ready for greater retail inflows, with macroeconomic factors and structural developments laying the foundation for greater retail adoption. The fintechs that are able to best seize the retail bond trading opportunity will be the ones who not only understand the market’s current growth trajectory, but who can offer low investment thresholds and enhanced accessibility to the bond market in the face of growing competition.