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From Wikipedia, the free encyclopedia

The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills, and so on.

Its primary goal is to provide long-term funding for public and private expenditures. The bond market has largely been dominated by the United States, which accounts for about 44% of the market.[1] As of 2009, the size of the worldwide bond market (total debt outstanding) is estimated at $82.2 trillion,[2] of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to Bank for International Settlements (BIS), or alternatively $35.2 trillion as of Q2 2011 according to Securities Industry and Financial Markets Association (SIFMA).[2]

The bond market is part of the credit market, with bank loans forming the other main component. The global credit market in aggregate is about 3 times the size of the global equity market. Bank loans are not securities under the Securities and Exchange Act, but bonds typically are and are therefore more highly regulated. Bonds are typically not secured by collateral (although they can be), and are sold in relatively small denominations of around $1,000 to $10,000. Unlike bank loans, bonds may be held by retail investors. Bonds are more frequently traded than loans, although not as often as equity.

Nearly all of the average daily trading in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized over-the-counter (OTC) market.[3] However, a small number of bonds, primarily corporate ones, are listed on exchanges. Bond trading prices and volumes are reported on FINRA's Trade Reporting and Compliance Engine, or TRACE.

An important part of the bond market is the government bond market, because of its size and liquidity. Government bonds are often used to compare other bonds to measure credit risk. Because of the inverse relationship between bond valuation and interest rates (or yields), the bond market is often used to indicate changes in interest rates or the shape of the yield curve, the measure of "cost of funding". The yield on government bonds in low risk countries such as the United States or Germany is thought to indicate a risk-free rate of default. Other bonds denominated in the same currencies (U.S. Dollars or Euros) will typically have higher yields, in large part because other borrowers are more likely than the U.S. or German Central Governments to default, and the losses to investors in the case of default are expected to be higher. The primary way to default is to not pay in full or not pay on time.

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  • ✪ Intro to the Bond Market
  • ✪ 2019 Bond Market Outlook
  • ✪ Office Hours: The Bond Market
  • ✪ Relationship between bond prices and interest rates | Finance & Capital Markets | Khan Academy
  • ✪ Explaining Bond Prices and Bond Yields


♪ [music] ♪ - [Alex] As we've seen, most individuals who want a loan, they borrow money from a bank. But for a well-known corporation like Starbucks, borrowing money may be available through another type of financial intermediary, the bond market. A bond is essentially an IOU. It documents who owes how much and when payment must be made. Like stocks, bonds are traded on markets. For an established company like Starbucks, investors - they already know enough about the company that they're willing to bypass the bank as an intermediary and lend to the company directly. So for a large company with a good reputation, this could mean they can borrow money on better terms from the bond market than they can through traditional bank lending. Starbucks, for example, has issued over a billion dollars of corporate bonds over the years, in order to fund their expansion plans. Now unlike a stock, if you buy a newly issued bond from Starbucks, you don't own part of Starbucks. You're simply lending Starbucks money, and in exchange, they're promising to pay you back a specific sum at a particular point in time. In addition, some bonds also pay out regular installments, called coupon payments, according to a preordained schedule. By issuing bonds, a company can raise capital and make big investments. And then they can repay that debt over a long timeline, as those investments provide a return. Corporations aren't the only institutions that borrow money in the bond market. Governments do so as well. In 2016, the U.S. government owed the public almost $14 trillion in promised bond payments. And because the government is so big, when it borrows money, it affects the entire market for saving and borrowing. Let's go back to the supply and demand for loanable funds. We'll use some numbers here for illustration. Here's the demand curve showing the demand for borrowing. Now, imagine that the government decides to borrow $100 billion. This shifts the demand for loanable funds up and to the right, increasing the equilibrium interest rate from 7% to 9%. A higher interest rate - that means that the quantity of savings supplied will increase, in this case, from $200 to $250 billion. Now remember, that if savings increases by $50 billion, that means that private consumption is falling by $50 billion. If we're saving more, that means we're consuming less. And because borrowing has become more expensive due to the higher interest rate, private investment will also fall. At a 9% interest rate, we can see that the private demand for loanable funds is $150 billion, $50 billion less than it was at an interest rate of 7%. We call these two effects “Crowding Out”. When the government borrows $100 billion, it crowds out private consumption and private investment. In this case, it crowds out $50 billion of private consumption and also $50 billion of private investment. Bonds aren't as risky as stocks because the bondholders must be paid before any profits are distributed to shareholders. But bonds do have risk, namely the risk that when the payments come due, the borrower won't be able to pay. That's called the default risk. If investors think that a firm issuing a bond has a significant default risk, they'll demand a higher interest rate to lend money. Bonds are rated by agencies, such as the S&P. The S&P ratings go from AAA, which are the safest bonds, all the way down to D, and anything lower than a BBB-, those are sometimes called “junk Bonds”. If you're curious, Starbucks gets an A-. Lending money to Starbucks, it's pretty safe, but you never know what might happen if all those pod people start making a lot more coffee at home. Now, the rating agencies aren't perfect. That became all too obvious during the recent financial crisis. However, generally speaking, you'll find that better rated bonds, they pay lower interest rates. And lower rated, riskier bonds, they pay higher interest rates. The state of Illinois has the lowest bond rating of any state government in the United States, an A-. And it has to pay significantly more to borrow money than does Virginia, which has the highest rating, a AAA. Another factor that determines the interest rate on a bond is whether the bond borrower can put up collateral, an asset that helps to guarantee the loan. If you want to borrow money to buy a house, you'll typically get a lower interest rate than if you want to borrow money to buy a vacation. How come? It's the same principle. The mortgage loan is less risky for the bank than the vacation loan because if you default, the bank can repossess your house. The house is collateral. But once you've been to Maui, the bank can't repossess your vacation. So it's cheaper to borrow money to buy a house than to go on vacation. Okay, we've covered banks, we've covered Stocks, we've covered bonds… But actually, there's many other financial intermediaries that we could talk about, including hedge funds, venture capital, mortgages, and a lot more. What are you curious about? Let us know. - [Narrator] If you want to test yourself, click "Practice Questions." Or if you're ready to move on, you can click "Go to the Next Video." You can also visit to see our entire library of videos and resources. ♪ [music] ♪ Subtitles by the community



The Securities Industry and Financial Markets Association (SIFMA) classifies the broader bond market into five specific bond markets.


Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both.

Participants include:

Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the United States, approximately 10% of the market is held by private individuals.


Amounts outstanding on the global bond market increased by 2% in the twelve months to March 2012 to nearly $100 trillion. Domestic bonds accounted for 70% of the total and international bonds for the remainder. The United States was the largest market with 33% of the total followed by Japan (14%). As a proportion of global GDP, the bond market increased to over 140% in 2011 from 119% in 2008 and 80% a decade earlier. The considerable growth means that in March 2012 it was much larger than the global equity market which had a market capitalisation of around $53 trillion. Growth of the market since the start of the economic slowdown was largely a result of an increase in issuance by governments.

The outstanding value of international bonds increased by 2% in 2011 to $30 trillion. The $1.2 trillion issued during the year was down by around a fifth on the previous year's total. The first half of 2012 was off to a strong start with issuance of over $800 billion. The United States was the leading center in terms of value outstanding with 24% of the total followed by the UK 13%.[4]

U.S. bond market size

  Treasury (35.16%)
  Corporate Debt (21.75%)
  Mortgage Related (22.60%)
  Municipal (9.63%)
  Money Markets (2.36%)
  Agency Securities (4.99%)
  Asset-backed (3.51%)

According to the Securities Industry and Financial Markets Association (SIFMA),[5] as of Q1 2017, the U.S. bond market size is (in billions):

Category Amount Percentage
Treasury $13,953.6 35.16%
Corporate Debt $8,630.6 21.75%
Mortgage Related $8,968.8 22.60%
Municipal $3,823.3 9.63%
Money Markets $937.2 2.36%
Agency Securities $1,981.8 4.99%
Asset-Backed $1,393.3 3.51%
Total $39,688.6 100%

Note that the total federal government debts recognized by SIFMA are significantly less than the total bills, notes and bonds issued by the U.S. Treasury Department,[6] of some $19.8 trillion at the time. This figure is likely to have excluded the inter-governmental debts such as those held by the Federal Reserve and the Social Security Trust Fund.


Bond market prices.
Bond market prices.

For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.

But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds falls, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rises, since new issues pay a lower yield. This is the fundamental concept of bond market volatility—changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes.

Economists' views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of "in-line" data. If the economic release differs from the consensus view, the market usually undergoes rapid price movement as participants interpret the data. Uncertainty (as measured by a wide consensus) generally brings more volatility before and after a release. Economic releases vary in importance and impact depending on where the economy is in the business cycle.


Bond markets determine the price in terms of yield that a borrower must pay in order to receive funding. In one notable instance, when President Bill Clinton attempted to increase the U.S. budget deficit in the 1990s, it led to such a sell-off (decreasing prices; increasing yields) that he was forced to abandon the strategy and instead balance the budget. [7][8]

I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.

— James Carville, political advisor to President Clinton, Bloomberg [8]

Bond investments

Bonds typically trade in $1,000 increments and are priced as a percentage of par value (100%). Many bonds have minimums imposed by the bond or the dealer. Typical sizes offered are increments of $10,000. For broker/dealers, however, anything smaller than a $100,000 trade is viewed as an "odd lot".

Bonds typically pay interest at set intervals. Bonds with fixed coupons divide the stated coupon into parts defined by their payment schedule, for example, semi-annual pay. Bonds with floating rate coupons have set calculation schedules where the floating rate is calculated shortly before the next payment. Zero-coupon bonds do not pay interest. They are issued at a deep discount to account for the implied interest.

Because most bonds have predictable income, they are typically purchased as part of a more conservative investment scheme. Nevertheless, investors have the ability to actively trade bonds, especially corporate bonds and municipal bonds with the market and can make or lose money depending on economic, interest rate, and issuer factors.

Bond interest is taxed as ordinary income, in contrast to dividend income, which receives favorable taxation rates. However many government and municipal bonds are exempt from one or more types of taxation.

Investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds and unit-investment trusts. In 2006 total bond fund net inflows increased 97% from $30.8 billion in 2005 to $60.8 billion in 2006.[9] Exchange-traded funds (ETFs) are another alternative to trading or investing directly in a bond issue. These securities allow individual investors the ability to overcome large initial and incremental trading sizes.

Bond indices

A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Barclays Capital Aggregate Bond Index, Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity or sector for managing specialized portfolios.

See also


  1. ^ "Archived copy". Archived from the original on 2016-04-07. Retrieved 2012-03-09.CS1 maint: Archived copy as title (link)
  2. ^ a b Outstanding World Bond Market Debt Archived August 26, 2013, at the Wayback Machine from the Bank for International Settlements via Asset Allocation Advisor. Original BIS data as of March 31, 2009; Asset Allocation Advisor compilation as of November 15, 2009. Accessed January 7, 2010.
  3. ^ Avg Daily Trading Volume Archived May 19, 2016, at the Wayback Machine SIFMA 1996 - 2016 Average Daily Trading Volume. Accessed April 15, 2016.
  4. ^ [1][permanent dead link] Bond Markets 2012 report
  5. ^ "Archived copy". Archived from the original on 2016-11-21. Retrieved 2013-07-10.CS1 maint: Archived copy as title (link) SIFMA Statistics
  6. ^ "Archived copy". Archived from the original on 2016-11-18. Retrieved 2011-09-29.CS1 maint: Archived copy as title (link) Treasury Bulletin
  7. ^ M&G Investments - Bond Vigilantes - Are the bond vigilantes vigilant enough?, 20 February 2009
  8. ^ a b Bloomberg - Bond Vigilantes Push U.S. Treasuries Into Bear Market Archived January 22, 2009, at the Wayback Machine, 10 February 2009
  9. ^ Bond fund flows Archived August 7, 2011, at the Wayback Machine SIFMA. Accessed April 30, 2007.
This page was last edited on 14 May 2019, at 20:40
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