The Market for Borrowing Corporate Bonds
Paul Asquith, MIT
Parag A. Pathak, MIT

This paper describes the market for borrowing corporate bonds using a comprehensive dataset from a major lender. The cost of borrowing corporate bonds is comparable to the cost of borrowing equity, between 10 and 20 basis points per year. Factors that increase borrowing costs are percentage of inventory lent, loan size, and rating. Trading strategies based on cost or amount of borrowing do not yield excess returns. Bonds with corresponding CDS contracts are more actively lent than those without. Finally, the 2007 Credit Crunch increased the variance but did not affect average borrowing cost or size of loan activity.

The profitability of investment strategies that use short corporate bond positions depends on the costs of borrowing these securities. This study examines those costs and identifies their primary determinants. The results should interest investment managers that are employ these strategies as well as those interested in market structure.