Bond Markets: What you need to know

The bond market is where participants can issue new debt or buy and sell debt securities to provide long-term funding for public and private expenditures. Now that you know how and where to buy bonds, you probably want to know about the actual bond market.

What is the Bond Market?

The bond market is a financial market where participants can issue new debt. Also referred to as the debt, credit or fixed-income market, it includes securities issued by the government and corporate debt securities. Its purpose is to provide long-term funding for both public and private expenditures.

The stock market often hogs the media attention, but the bond market is actually significantly bigger! It’s also quite vital to the ongoing operation of both the public and private sector.

The majority of trading in the bond market happens over-the-counter and is composed of both the primary market and the secondary market. Debt securities are issued and sold by borrowers to lenders through the primary market. It’s through the secondary market where investors buy and sell previously issued debt securities among themselves.

Bond Market News

There are many places you can receive bond market news. Here are your best resources:

General bond market tips

Investing in bonds isn’t for everybody. While many experts agree that at least some of your portfolio should be made up of bonds, there are certain types of investors who fit the mold a little better.

You would be more likely to invest in bonds:

1. If you are a relatively conservative investor.

Bonds are considered to be a safer alternative to stocks in the short term. They are less volatile, meaning there will be less swings.

2. If you feel the stock market is too risky and you want to make sure all your eggs aren’t in the same basket

Stocks tend to outperform bonds over time. Though in the short-term, bear markets could cause your stock investments to lose value. However, as the graph below indicates, Bonds have typically been more stable than any other asset.

3. If you cared more about generating income from your investments rather than appreciation.

Bonds pay a regular interest rate (income) but usually do not go up in value as much as stocks, ETFs or mutual funds do.

4. If you are a retiree

Investors in retirement have a shorter investment horizon. Therefore you will care more about income generation and safety.

Some of the key variables to look at when deciding whether to invest in bonds are: their maturity, redemption features, credit quality, interest rate, price, yield, and potential tax benefits. Together, these factors help determine the value of a bond investment and how well it matches your personal investment goals.

International bond market

International bonds are just debt investments that are issued in a country by a non-domestic entity, in their native country’s currency. The main benefits of investing in international bonds are portfolio diversification, higher historical returns and currency benefits.

While they do offer diversification opportunities, foreign bonds can also carry considerable risk. Currency and default risks are the biggest concerns.

Due to multiple levels of risk, investing in global bonds is often best left to a portfolio manager. Most international bond issues are difficult to purchase directly from the sovereign government or offshore corporation that issues them. In some cases, actually, foreign governments won’t even allow the purchase of government bonds by non-residents! So even if you feel comfortable…we’d still push for a portfolio manager.

Junk bond market

Junk bonds aren’t really all that different from regular bonds. They, too, are a debt from a corporation or organization. Like regular bonds, a junk bond will have a principal (amount to be paid back), a maturity date (the date by which it will be paid back) and a coupon (interest rate). The different is the issuer’s credit quality.

Their poor credit rating makes it difficult for them. Junk bonds pay high yield to bondholders because the borrowers don’t really have other options. Junk bonds are typically rated ‘BB’ or lower.

Junk bonds can be broken down into two subcategories:

  • Fallen Angels – A bond that was once investment grade but has since been reduced to junk-bond status because of the issuing company’s poor credit quality.
  • Rising Stars – A bond on its way to being investment quality, whose rating has been increased because of the issuing company’s improving credit quality.

Despite their name, junk bonds can be valuable investments for informed investors. Just be sure to understand that with their potential high returns comes the potential for high risk!

PRICE DROP: Get 12 months of Motley Fool stock picks and save $110. New Subscribers can try the service now for just $89.