The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills, and so on.
Its primary goal is to provide long-term funding for public and private expenditures. The bond market has largely been dominated by the United States, which accounts for about 39% of the market. As of 2017, the size of the worldwide bond market (total debt outstanding) is estimated at $100.13 trillion, according to Securities Industry and Financial Markets Association (SIFMA).
The bond market is part of the credit market, with bank loans forming the other main component. The global credit market in aggregate is about 3 times the size of the global equity market. Bank loans are not securities under the Securities and Exchange Act, but bonds typically are and are therefore more highly regulated. Bonds are typically not secured by collateral (although they can be), and are sold in relatively small denominations of around $1,000 to $10,000. Unlike bank loans, bonds may be held by retail investors. Bonds are more frequently traded than loans, although not as often as equity.
Nearly all of the average daily trading in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized over-the-counter (OTC) market. However, a small number of bonds, primarily corporate ones, are listed on exchanges. Bond trading prices and volumes are reported on Financial Industry Regulatory Authority's (FINRA) Trade Reporting and Compliance Engine, or TRACE.
An important part of the bond market is the government bond market, because of its size and liquidity. Government bonds are often used to compare other bonds to measure credit risk. Because of the inverse relationship between bond valuation and interest rates (or yields), the bond market is often used to indicate changes in interest rates or the shape of the yield curve, the measure of "cost of funding". The yield on government bonds in low risk countries such as the United States or Germany is thought to indicate a risk-free rate of default. Other bonds denominated in the same currencies (U.S. Dollars or Euros) will typically have higher yields, in large part because other borrowers are more likely than the U.S. or German Central Governments to default, and the losses to investors in the case of default are expected to be higher. The primary way to default is to not pay in full or not pay on time.
The Securities Industry and Financial Markets Association (SIFMA) classifies the broader bond market into five specific bond markets.
Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both.
Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, 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 held by private individuals.
Amounts outstanding on the global bond market increased by 2% in the twelve months to March 2012 to nearly $100 trillion. Domestic bonds accounted for 70% of the total and international bonds for the remainder. The United States was the largest market with 33% of the total followed by Japan (14%). As a proportion of global GDP, the bond market increased to over 140% in 2011 from 119% in 2008 and 80% a decade earlier. The considerable growth means that in March 2012 it was much larger than the global equity market which had a market capitalisation of around $53 trillion. Growth of the market since the start of the economic slowdown was largely a result of an increase in issuance by governments.
The outstanding value of international bonds increased by 2% in 2011 to $30 trillion. The $1.2 trillion issued during the year was down by around a fifth on the previous year's total. The first half of 2012 was off to a strong start with issuance of over $800 billion. The United States was the leading center in terms of value outstanding with 24% of the total followed by the UK 13%.