Government And Agency Bond Markets

Published Date: 02 Nov 2017

Bond market refers to the environment whereby persons issue debts and trade on debt securities. It can also be referred to a financial market whereby persons issue new debts or sell debt securities to the government inform of bonds. The basic idea of establishing bond markets is to a quick way of resourcing funds for both public and private projects. Bonds are defined by providing long term source of money to the government and corporate under fixed interest rates. Customarily, the world wide bond market had been dominated by the US before other states thought of investing in this form of financing. By the year 2009, the bond market was reading approximately 82.2 trillion US dollars. The bond market involves two forms of markets namely; the primary market and the secondary market. The primary market involves issuing of debt securities to borrowers which are then sold to lenders. On the other side, secondary market entails investors who purchase or sell among themselves debt securities that have previously been issued. The bond market is exceptionally crucial to the operations of both private and public sector. All bonds come with specifications of maturity period. When a bond matures, the bond holder is usually granted his principal contribution plus the accrued interest. In cases where a bond holder considers selling the bond while it is still immature, his returns are affected by market risk.

Types of bond markets

Corporate bond market in simple terms refers to a bond that is issued by a corporation. This lays to be the best and most preferred way for cooperates to raise large amounts of money to expand business. There are two types of bonds that lie in the bracket of corporate bonds which are distinguished by their nature of redemption. The first type of corporate bond is one that allows the seller to redeem the bond before maturity whereas, the second type has the option of converting the bond into an equity. Industrial, manufacturing and financial corporations are examples of corporations that issue corporate bonds. Compared to government bonds, this type of bonds appears to have higher risk. The level of risk is determined by the status of the corporation issuing the bond, the prevailing market status and the government under which the corporate falls.

Government and agency bond markets

The name itself is suggestive as to why these are referred to as government agency bonds. Government bonds have been known to possess a maturity period that is not less than one calendar year. The congress identifies certain Government Sponsored Enterprises that are tasked with the role of providing low interest rate loans.

Municipal bond markets

The above are debt securities that are issued by states, counties and cities or any other entity allied to the government so as to pull funds for public infrastructure. Local authorities issue these form of bonds so as to raise large sums of money to build roads, municipal markets, drainage systems and other public amenities. Municipal bonds are said to be exceedingly attractive because they are not subject to national income taxes.

Mortgage backed and Asset backed securities bond market

Mortgage backed securities are bonds issued by financial institutions to persons who are interested in mortgaging loans. Persons who are interested in purchasing residential homes or commercial estates seek financial help from financial institutions. The overall outcome of these bonds is the principal amount together with the accrued interest. Examples of agencies that issue these forms of bonds include; the Federal National Mortgage association and the Government National Mortgage Association.

On the other side, Asset backed securities are not far much different from the mortgage backed securities. They are characterized by interest in certain assets which include auto leases, auto loans and home equity loans.

Participants in the Bond market

These are not different from participants in the financial markets and involve either buyers or sellers and in other satiations both of them. Participants include; governments, traders, individuals and institutional investors. Many of the bond transactions are held by financial institutions like banks, pension funds and mutual funds.

The size of bond markets

The size of the bond market has changed from $2.54 trillion in 1980 to $37.46 trillion by 2012. By 2011, the composition of the bond market was such that treasury bonds are the most traded ones followed by mortgage related bonds and then third position is taken by corporate bonds. The least traded bonds at this time were the agency bonds and asset backed bonds. By 2012, the United States led in the world bonds market by 33% followed by Japan which had 14%.

Volatility of the Bond Market

It is noted that entrepreneurs who sell their bonds before the specific maturity time face risks of flatuation of interest rates. An increase in interest rates leads to a decrease in the value of bonds and vice versa. This unique characteristic of bonds is what makes them be referred to as volatile. The fluctuation of interest rate is a factor of a nation’s monetary policy.

Bond Market Influence

Bond markets always determine the price that a client should pay so as to receive funding.

Bond investments and indices

Investors take part in the bond market via closed end funds, unit-investment trusts and bond funds. Bond indices are risks that are faced by a bond investor. The most significant risk associated with bonds is the issue of interest rate. As discussed earlier in this paper, the relationship between interest rate and bonds is an inverse proportional one. The bond market provides bond listings which are tools used to reflect the performance of certain securities. When there are no signs of inflation, the market of bonds has promising status. This is to mean that there are no signs of having the bonds fail to yield positive results.

Conclusion

The bond market appears complex to many, but it is similar to stock markets in terms of returns and risks. Goverments of various states have in a long time depended on bonds for funding of huge public projects. The level of yield from bonds is extremely depended on the length of maturity. Though bonds are negatively affected by rise in interest rates, at most times they deliver a positive yield. Bonds, and in specific government bonds appear to be the safest method of long term investment. This is because, once one has done their duty of purchase of bonds, they have no duty left other than sitting back to watch their money grow. Investors who are used to purchasing bonds and who have clear knowledge on operation of bonds would not hesitate to invest in bods.