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The bond market refers to people and entities involved in buying and selling of bonds and the quantity and prices of those transactions over time. Participants in the market trade bonds issued by corporations and various government bodies.
Because of the relationship between bond prices and interest rates, references to the "bond market" are often used to indicate changes in interest rates or the shape of the yield curve. Other names for the bond market are the credit market and the debt market.
Market structure
Unlike the stock market, or markets for futures and options, bond markets in most countries remain decentralized and lack common exchanges. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger. In the United States, various banks act as market makers - though they are not obligated to buy or sell and may stop participation at any time.
Bond holders
Because of the individuality of individual bond issues, and the lack of liquidity in many smaller issues, in most countries, 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 currently held by private individuals.
Bond Investments
Individuals, however, can invest in bonds through Fixed income mutual funds. While most such funds will diversify, using the Lehman Brothers Aggregate Bond Index (LBAG) as a benchmark, some will specialize in municipal bonds or high-yield bonds.
Bond Market Volatility
Individual bonds are subject to two main risks: credit risk and interest rate risk.
When a company's (or government's) credit rating is lowered by a Credit rating agency (Moody's or Standard & Poor's) its bond price will decrease, due to the increased risk that the issuer will default. While this rarely affects the bond market as a whole, it can negatively affect other issuers when companies from the same industry are downgraded.
Much more detrimental to the larger bond market are interest rate increases. When interest rates increase, the value of existing bonds falls, since new issues pay a higher yield.
See also
External links
- The Bond Market Association
- ShibuiMarkets
- Bonds 101, bonds.yahoo.com
- Fixed-Income Funds
"Bond market"