Unlike Equity and Money markets, there is no specific bond market to trade bonds. However, there are domestic and foreign participants who sell and buy bonds in various bond markets.
A bond market is much larger than equity markets, and the investments are huge too. However, bonds pay on maturity and they are traded for short-time before maturity in the markets.
Bonds also have risks, returns, indices, and volatility factors like equity and money markets. The international bond market is composed of three separate types of bond markets: Domestic Bonds, Foreign Bonds, and Eurobonds.
Domestic bonds trade is a part of the international bond market. Domestic bonds are dealt in local basis and domestic borrowers issue the local bonds. Domestic bonds are bought and sold in local currency.
In foreign bond market, bonds are issued by foreign borrowers. Foreign bonds normally use the local currency. The concerned local market authorities supervise the issuance and sale of foreign bonds.
Foreign bonds are traded in the foreign bond markets. Some special characteristics of the foreign bond markets are −
In the past, Continental private banks and old merchant houses in London linked the investors with the issuers.
Eurobonds are not sold in any specific national bond market. A group of multinational banks issue Eurobonds. A Eurobond of any currency is sold outside the nation that has the currency. A Eurobond in the US dollar would not be sold in the United States.
The Euromarket is the trading place of Eurobonds, Eurocurrency, Euronotes, Eurocommercial Papers, and Euroequity. It is commonly an offshore market.
Bond market participants are either buyers (debt issuer) or sellers (institution) of funds and often both of these. Participants include −
Since there is a specificity of individual bond issues, and a condition of lack of liquidity in case of many smaller issues, a significantly larger chunk of outstanding bonds are often held by institutions, such as pension funds, banks, and mutual funds. In the United States, the private individuals own about 10% of the market.
Amounts outstanding on the global bond market on March 2012 were about $100 trillion. That means in March 2012, the bond market was much larger than the global equity market that accounted for a market capitalization of around $53 trillion.
The outstanding value of international bonds in 2011 was about $30 trillion. There was a total issuance of $1.2 trillion in the year, which was down by around one fifth of the 2010’s total. In 2012, the first half saw a strong start with issuance of over $800 billion.
For the market participants owning bonds, collecting coupons and holding it till maturity, market volatility is not a matter to ponder over. The principal and interest rates are pre-determined for them.
However, participants who trade bonds before maturity face many risks, including the most important one – changes in interest rates. When interest rates increase, the bond-value falls. Therefore, changes in bond prices are inversely proportional to the changes in interest rates.
Economic indicators and paring with actual data usually contribute to market volatility. Only little price movement is seen after the release of "in-line" data. When economic release does not match the consensus view, a rapid price movement is seen in the market. Uncertainty is responsible for more volatility.
Bonds have (generally) $1,000 increments. Bonds are priced as a percentage of par value. Many bonds have minimums imposed on them.
Bonds pay interests at given intervals. Bonds with fixed coupons usually divide the coupon according to the payment schedule. Bonds with floating rate coupons have set calculation schedules. The rate is calculated just before the next payment. Zero-coupon bonds are issued at a deep discount, but they don’t pay interests.
Bond interest is taxed, but in contrast to dividend income that receives favorable taxation rates, they are taxed as ordinary. Many government bonds are, however, exempt from taxation.
Individual investors can participate through bond funds, closed-end funds, and unit-investment trusts offered by investment companies.
A number of bond indices exist. The common American benchmarks include Barclays Capital Aggregate Bond Index, Citigroup BIG, and Merrill Lynch Domestic Master.