what is the bond market 
the bond market is often referred to as the debt market fixed income market or credit market it is the collective name given to all trades and issues of debt securities governments issue bonds to raise capital to pay debts or fund infrastructural improvements publicly traded companies issue bonds to finance business expansion projects or maintain ongoing operations investopedia danie drankwalterhistory of the bond marketsloans that were assignable or transferrable to others appeared as early as ancient mesopotamia where debts denominated in units of grain weight could be exchanged among debtors the recorded history of debt instruments dates back to 2400 b c via a clay tablet discovered at nippur now present day iraq this artifact cites a guarantee for payment of grain and the consequences if the debt was not repaid 12in the middle ages governments issued sovereign debt to fund wars the bank of england the world s oldest central bank was established to raise money to rebuild the british navy in the 17th century through bonds 3 the first u s treasury bonds were issued to help fund the military first in the war of independence from the british crown and again in the form of liberty bonds to raise funds to fight world war i 45early chartered corporations such as the dutch east india company voc and the mississippi company issued debt instruments before they issued stocks 67 these bonds such as in the image above were guarantees or sureties and were hand written to the bondholder buying and trading bondsbonds are traded on the primary market and the secondary market the primary market is the new issues market and transactions occur directly between the bond issuers and the bond buyers this offering is known as the primary distribution the primary market holds brand new debt securities not previously offered to the public 8in the secondary market securities previously sold in the primary market are bought and sold 9 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 as pension funds mutual funds and life insurance policies types of bondscompanies issue corporate bonds to raise money for current operations expanding product lines or opening up new manufacturing facilities corporate bonds are commonly longer term debt instruments with a maturity of at least one year and are commonly categorized into two types based on the credit rating assigned to the bond and its issuer 1011investment grade signifies a high quality bond that presents a relatively low risk of default bond 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 1213junk bonds or high yield bonds carry a higher risk junk bonds represent bonds issued by companies that are financially struggling and have a high risk of defaulting not paying their interest payments or repaying the principal to investors junk bonds are also called high yield bonds since the higher yield is needed to help offset any risk of default 14nationally issued government bonds or sovereign bonds entice buyers by paying out the face value listed on the bond certificate on the agreed maturity date with periodic interest payments this makes government bonds attractive to conservative investors and considered the least risky in the u s government bonds are known as treasuries and the most active and liquid bond market in august 2023 fitch ratings downgraded the long term ratings of the united states to aa from aaa based on the expected fiscal deterioration over the next three years a high and growing general government debt burden and the erosion of governance relative to aa and aaa peers over the last two decades with repeated debt limit standoffs and untimely resolutions 16municipal bonds or 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 that seek to raise cash to fund various projects municipal bonds are commonly tax free at the federal level and can be tax exempt at state or local tax levels making them attractive to qualified tax conscious investors a general obligation bond go bond is issued by government entities not backed by revenue from a specific project some go bonds are backed by property taxes or payable from general funds a revenue bond secures principal and interest payments through sales fuel hotel occupancy or other taxes when a municipality is a conduit issuer of bonds a third party covers interest and principal payments 17mortgage backed security mbs issues consist of pooled mortgages on real estate properties the investor who buys a mortgage backed security is essentially lending money to homebuyers through their lenders these typically pay monthly interest 18the mbs is a type of asset backed security abs 19 during the subprime mortgage meltdown of 2007 2010 this type of security relied on failed mortgages to support it 20governments and companies in emerging market economies issue bonds that provide growth opportunities but with greater risk than domestic or developed bond markets in the 1980s u s treasury secretary nicholas brady began a program to help global economies restructure their debt via bond issues denominated in u s dollars many countries in latin america issued these brady bonds throughout the next two decades marking an upswing in the issuance of emerging market debt 21 bonds are issued in developing nations and by corporations in asia latin america eastern europe africa and the middle east 22investing in emerging market bonds includes the standard risks that accompany all debt issues such as the variables of the issuer s economic or financial performance and the ability of the issuer to meet payment obligations these risks can be heightened by the political and economic volatility in developing nations emerging market risks also include exchange rate fluctuations and currency devaluations 23bond indicesjust as the s p 500 and the russell indices track equities bond indices like the bloomberg aggregate bond index the merrill lynch domestic master and the citigroup u s broad investment grade bond index track and measure corporate bond portfolio performance the bloomberg u s aggregate bond index the agg is a market weighted benchmark index it provides investors with a standard against which they can evaluate a fund or security the index includes government and corporate bonds and investment grade corporate debt instruments with issues higher than 300 million and maturities of one year or more 24 the agg is a total return benchmark index for many bond funds and exchange traded funds etfs bond market vs stock marketbonds represent debt financing while stocks are equity financing bonds are a form of credit where the bond issuer must repay the bond owner s principal plus additional interest stocks do not entitle the shareholder to any return of capital because of their legal protections and guarantees bonds are typically less risky than stocks and command lower expected returns than stocks stocks are inherently riskier than bonds and have the potential for bigger gains or bigger losses both stock and bond markets tend to be very active and liquid bond prices tend to be sensitive to interest rate changes varying inversely to interest rate moves stock prices are sensitive to changes in future profitability and growth potential 2526investors without access to bond markets can still invest in bonds through bond focused mutual funds and etfs advantages and disadvantages of bondsfinancial experts commonly recommend a well diversified portfolio with some allocation to the bond market bonds can be less volatile than stocks with lower returns and carry credit and interest rate risk owning too many bonds is considered overly conservative over long time horizons 27less risky and less volatile than stocks wide range of issuers and bond types to choose from bondholders have preference over shareholders in the event of bankruptcy lower risk translates to lower return buying bonds in the primary market is less accessible for ordinary investors exposure to default risk and interest rate risk 