An Introduction to Fixed Income Investment
A bond market, also known as a fixed income market, is a financial investment market where participants buy and sell debt securities.
As of 2008, the total international bond market was believed to be worth $67 trillion. Of that, the American bond market is thought to have a total net worth of $33.5 trillion.
References to the term “bond market” usually refer to government bond markets. This is generally the case because of their size and liquidity, as well as their lack of credit risk. Additionally, due to the inverse relationship between bond valuation and interest rates, bond markets are sometimes used as an indicator of sudden changes in interest rates.
Bond Market Structure
In most countries, bond markets are decentralized. The reason for this is because, unlike stock exchanges or futures markets, no two bonds are exactly alike. One of the consequences of this decentralized market structure is that trading in bonds can incur higher costs at the expense of less liquidity in some cases.
In their 2004 paper, Secondary Trading Costs in the Municipal Bond Market, Lawrence Harriss and Michael Piwowar concluded that, “municipal bonds are substantially more expensive than similar sized equity trades.” They argued that this difference in price is a result of the lack of transparency in the bond market. Continue reading “What is a Bond Market?”