13.8 : Bond Markets

The bond market, also known as the debt or credit market, is a vast platform where debt securities such as bonds are issued and traded. It consists of two key segments, the primary market, where new bonds are issued to raise capital, and the secondary market, where existing bonds are traded among investors, providing liquidity.

The bond market is crucial for enabling governments and corporations to secure funding while offering stable returns to investors. The U.S. Treasury market, the largest securities market globally, highlights the scale and significance of bonds in global finance.

Most bond trading occurs in over-the-counter (OTC) markets, a decentralized system where transactions are privately negotiated. Unlike stock exchanges, OTC markets historically lacked transparency, making real-time price and volume data challenging to access.

However, initiatives like TRACE (Trade Reporting and Compliance Engine), introduced in 2002, have enhanced transparency in the corporate bond market by requiring trade reporting. Advancements in technology are further enhancing transparency and access to bond market data, even for retail investors.

Bond prices in OTC markets are shaped by inflation expectations and the yield curve, which illustrates yields across different maturities. Pricing conventions include clean prices, which exclude accrued interest, and dirty prices, which include accrued interest.

These factors and considerations, like credit ratings and term structures, make the bond market a sophisticated yet essential element of global finance.