What Is the Bond Market?
The bond market—often called the debt market, fixed-income market, or credit market—is the collective name given to all trades and issues of debt securities. Governments typically issue bonds in order to raise capital to pay down debts or fund infrastructural improvements. Publicly-traded companies issue bonds when they need to finance business expansion projects or maintain ongoing operations.
- The bond market broadly describes a marketplace where investors buy debt securities that are brought to the market by either governmental entities or publicly-traded corporations.
- National governments generally use the proceeds from bonds to finance infrastructural improvements and pay down debts.
- Companies issue bonds to raise the capital needed to maintain operations, grow their product lines, or open new locations.
- Bonds are either issued on the primary market, which rolls out new debt, or on the secondary market, in which investors may purchase existing debt via brokers or other third parties.
Understanding Bond Markets
The bond market is broadly segmented into two different silos: the primary market and the secondary market. The primary market is frequently referred to as the "new issues" market in which transactions strictly occur directly between the bond issuers and the bond buyers. In essence, the primary market yields the creation of brand new debt securities that have not previously been offered to the public.
In the secondary market, securities that have already been sold in the primary market are then bought and sold at later dates. Investors can purchase these bonds from a broker, who acts as an intermediary between the buying and selling parties. These secondary market issues may be packaged in the form of pension funds, mutual funds, and life insurance polices—among many other product structures.
Bond investors should be mindful of the fact that junk bonds, while offering the highest returns, present the greatest risks of default.
Types of Bond Markets
The general bond market can be segmented into the following bond classifications, each with its own set of attributes.
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.
National-issued government bonds (or Treasuries) entice buyers by paying out the face value listed on the bond certificate, on the agreed maturity date, while also issuing periodic interest payments along the way. This characteristic makes government bonds attractive to conservative investors.
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.
These issues, which consist of pooled mortgages on real estate properties, are locked in by the pledge of particular collateralized assets. They pay monthly, quarterly, or semi-annual interest.
Emerging Market Bonds
Issued by governments and companies located in emerging market economies, these bonds provide much greater growth opportunities, but also greater risk, than domestic or developed bond markets.
Just as the S&P 500 and the Russell indices track equities, big-name bond indices like Barclays Capital Aggregate Bond Index, the Merrill Lynch Domestic Master and the Citigroup U.S. Broad Investment-Grade Bond Index, manage and measure bond portfolio performance. Many bond indices are members of broader indices that measure the performances of global bond portfolios.
The Barclays (formerly Lehman Brothers) Government/Corporate Bond Index, also known as the 'Agg', is an unmanaged market-weighted benchmark index. Like other benchmark indexes, it provides investors with a standard against which they can evaluate the performance of a fund or security. As the name implies, this index includes both government and corporate bonds. The index consists of investment grade corporate debt instruments with issues higher than $100 million and maturities of one year or more. The Lehman Brothers Government/Corporate Bond Index is a total return benchmark index for many bond funds.