Introduction of Bond Market - Brief Introduction of Bond Market

Brief Introduction of Bond Market

The Global bond markets can be classified by several bond characteristics, including types of issuer, credit quality, maturity, coupon, currency, geography, indexing, and taxable status. The most widely used classify criterion is whether the bonds are newly issued or previously issued. Sales of newly issues bonds are referred to as primary market transactions. Newly issued bonds can be registered with securities regulators for sale to the public, a public offering or sold only to qualified investors, a private placement. Trading of previously issued bonds are conducted in the secondary markets. Some government bonds and corporate bonds are traded on exchanges, the great majority of trading in the secondary market is conducted with the dealers.

The main participants of the market are institutional investors, government, traders, and individual investors. The institutional investors include banks, insurance companies, pensions, hedge funds, investment advisors, endowments and mutual funds. Besides the main participants, the rating agency is quite important to the entire market. A credit rating agency provides assessments about the creditworthiness of different kinds of bonds. It rates the issuers ability to pay back the debt and the likelihood of default. The world Famous “Big Three” credit rating agencies, Moody’s, Standard & Poor’s, Fitch Ratings, approximately control 95% of the rating business in the world. That is to say, rating business handed out by each of the “Big Three” have widespread implications for investors and global markets.

The US bond market began as part of the funding plans for the World War I. Over $21 billion dollars of debt were raised during this period. Until 1929, the United States Treasury issued subscription bonds where the public signed up for a set coupon and maturity price of par. Demand for this kind of investment became so great that the government had to undertake auctions to sell the bonds. These auctions became a regular event and were important as the yields in each maturity were used to as a “risk free rate” for credit purposes. In the following years, Foreign governments became holders of United States debt as they began to have surpluses in the balance of trade. And in the early 1980s, bond yields rose substantially due to increases in commodity prices, labor wage increases and expanding deficits. In the 1990s, the rise of computer science and the desire of portfolio managers to better control risk led to the development of derivative securities. Derivatives often combine the Treasury security with other securities to form a chain of events designed to lower risk but maintain total return. In the recent year, the global bonds market grew very fast. According to the data collected from SIFMA, the issuance and outstanding of bonds every year in the market is growing up sharply. And the size of the world bond market as of 2007 was $44 trillion, and the United States market is approximately $25 trillion. Average daily transaction volume is almost $1 trillion dollars per day.