The bond market is for participants that are involved in the issuance and trading of debt securities. It primarily includes government-issued and corporate debt securities, and can essentially be broken down into three main groups: issuers, underwriters, and purchasers.

Key Takeaways

  • The bond market is a financial marketplace where investors can buy debt securities that are either issued by governments or corporations.
  • Issuers sell bonds or other debt instruments to raise money; most bond issuers are governments, banks, or corporate entities.
  • Underwriters are investment banks and other firms that help issuers sell bonds.
  • Bond purchasers are the corporations, governments, and individuals buying the debt that is being issued.

Bond Issuers

The issuers sell bonds or other debt instruments in the bond market to fund the operations of their organizations. This area of the market is mostly made up of governments, banks, and corporations.

The biggest of these issuers is the government, which uses the bond market to fund a country's operations, such as social programs and other necessary expenses. The U.S. government segment also includes some of its agencies, such as Fannie Mae, which offers mortgage-backed securities. Municipal bonds—commonly abbreviated as "muni" bonds—are locally issued by states, cities, special-purpose districts, public utility districts, school districts, publicly-owned airports and seaports, and other government-owned entities who seek to raise cash to fund various projects. Municipal bonds are commonly tax-free at the federal level and can also be tax-exempt at state or local tax levels too, making them attractive to qualified tax-conscious investors.

Companies issue corporate bonds to raise money for a sundry of reasons, such as financing current operations, expanding product lines, or opening up new manufacturing facilities. Corporate bonds usually describe longer-term debt instruments that provide a maturity of at least one year. Corporate bonds are typically classified as either investment-grade or else high-yield (or "junk"). This categorization is based on the credit rating assigned to the bond and its issuer. An investment-grade is a rating that signifies a high-quality bond that presents a relatively low risk of defaultBond-rating firms like Standard & Poor’s and Moody's use different designations, consisting of the upper- and lower-case letters "A" and "B," to identify a bond's credit quality rating.

Banks are also key issuers in the bond market and they can range from local banks up to supranational banks such as the European Investment Bank, which issues debt in the bond market. The final major issuer in the bond market is the corporate bond market, which issues debt to finance corporate operations.

There are four major types of bond classifications: corporate bonds, government bonds, municipal bonds, and mortgage-backed bonds.

Bond Underwriters

The underwriting segment of the bond market is traditionally made up of investment banks and other financial institutions that help the issuer to sell the bonds in the market. In general, selling debt is not as easy as just taking it to the market. In most cases, millions (if not billions) of dollars are being transacted in one offering. As a result, a lot of work needs to be done—such as creating a prospectus and other legal documents—in order to sell the issue.

In general, the need for underwriters is greatest for the corporate debt market because there are more risks associated with this type of debt.

$43.17 trillion

The approximate size of the U.S. bond market at the end of the first quarter of 2019—the most recent data available, according to the Securities Industry and Financial Markets Association (SIFMA).

Bond Purchasers

The final players in the market are those who buy the debt that is being issued in the market. They basically include every group mentioned as well as any other type of investor, including the individual. Bondholders essentially become creditors, or lenders, to the issuer. If you buy a U.S. Treasury, the federal government owes you money. If you buy a corporate bond, the company that issued it owes you money. Bonds are widely considered to be a core part of a well-diversified portfolio.

Governments play one of the largest roles in the bond market because they borrow and lend money to other governments and banks. Furthermore, governments often purchase debt from other countries if they have excess reserves of that country's money as a result of trade between countries. For example, China and Japan are major holders of U.S. government debt.