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. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures. Traditionally, the bond market has been largely dominated by the United States, and today the US is about 44% of the market. As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion, of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to Bank for International Settlements (BIS), or alternatively $35.2 trillion as of Q2 2011 according to Securities Industry and Financial Markets Association (SIFMA).
Nearly all of the $822 billion average daily trading volume 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, are listed on exchanges.
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, the bond market is often used to indicate changes in interest rates or the shape of the yield curve. The yield curve is the measure of "cost of funding".
Types of bond markets
The Securities Industry and Financial Markets Association (SIFMA) classifies the broader bond market into five specific bond markets.
- Government & agency
- Mortgage backed, asset backed, and collateralized debt obligation
Bond market participants
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 currently held by private individuals.
Bond market size
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 US 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 $800bn. The US was the leading centre in terms of value outstanding with 24% of the total followed by the UK 13%.
U.S. bond market size
According to the Securities Industry and Financial Markets Association (SIFMA), as of Q4 2013, the U. S. bond market size is (in billions):
Note that the total Federal Government debts recognized by SIFMA are significantly less than the total bills, notes and bonds issued by the U. S. Treasury Department, of some 17.5 trillion dollars at the time. This figure is likely to have excluded the inter-governmental debts such as those held by the Federal Reserve and the Social Security Trust.
Bond market volatility
For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.
But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds falls, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rises, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes.
Economists' views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of "in-line" data. If the economic release differs from the consensus view, the market usually undergoes rapid price movement as participants interpret the data. Uncertainty (as measured by a wide consensus) generally brings more volatility before and after an economic release. Economic releases vary in importance and impact depending on where the economy is in the business cycle.
Bond market influence
Bond markets determine the price in terms of yield that a borrower must pay in order to receive funding. In one notable instance, when President Clinton attempted to increase the US budget deficit in the 1990s, it led to such a sell-off (decreasing prices; increasing yields) that he was forced to abandon the strategy and instead balance the budget. 
I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.
Bonds typically trade in $1000 increments and are priced as a percentage of par value (100%). Many types of bonds have minimum increments imposed either by the bond itself or by the dealer selling them. Typical sizes offered are increments of $10,000. For broker/dealers, however, anything smaller than a $100,000 trade is viewed as an "odd lot".
Bonds typically pay interest at set intervals. Bonds with fixed coupons divide the stated coupon into parts defined by their payment schedule, for example, semi-annual pay. Bonds with floating rate coupons have set calculation schedules where the floating rate is calculated shortly before the next payment. Zero-coupon bonds do not pay interest. They are issued at a deep discount to account for the implied interest.
Because most bonds have predictable income, they are typically purchased as part of a more conservative investment scheme. Nevertheless, investors have the ability to actively trade bonds, especially corporate bonds and municipal bonds with the market and can make or lose money depending on economic, interest rate, and issuer factors.
Bond interest is taxed as ordinary income, in contrast to dividend income which receives favorable taxation rates. However many government and municipal bonds are exempt from one or more types of taxation.
Investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds and unit-investment trusts. In 2006 total bond fund net inflows increased 97% from $30.8 billion in 2005 to $60.8 billion in 2006. Exchange-traded funds (ETFs) are another alternative to trading or investing directly in a bond issue. These securities allow individual investors the ability to overcome large initial and incremental trading sizes. One firm that leverages on the debt market is Ted Virtue's MidOcean Partners.
A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Barclays Capital Aggregate Bond Index, Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity and/or sector for managing specialized portfolios.
- Bond market index
- Bond valuation
- Corporate bond
- Deferred financing costs
- Government bond
- Interest rate risk
- Primary market
- Secondary market
- Bullet strategy
- Barbell strategy
- War Bond
||This article includes a list of references, but its sources remain unclear because it has insufficient inline citations. (July 2008)|
- Outstanding World Bond Market Debt from the Bank for International Settlements via Asset Allocation Advisor. Original BIS data as of March 31, 2009; Asset Allocation Advisor compilation as of November 15, 2009. Accessed January 7, 2010.
- Avg Daily Trading Volume SIFMA 2009 Jan-Nov Average Daily Trading Volume. Accessed January 6, 2010.
-  Bond Markets 2012 report
-  SIFMA Statistics
-  Treasury Bulletin
- M&G Investments - Bond Vigilantes - Are the bond vigilantes vigilant enough?, 20 February 2009
- Bloomberg - Bond Vigilantes Push U.S. Treasuries Into Bear Market, 10 February 2009
- Bond fund flows SIFMA. Accessed April 30, 2007.