Bond market is an attention-snatching market that higher corporates always look into; having a series of identities such as debt market, credit market or fixed-income market it has further been categorized into sub markets which includes government bonds, corporate bonds and municipal bonds.
These names revealing its regional and political influence to the market it could be a matter of selection as to which market we are planning to discuss about; for instance, municipal bonds are bonds that are usually issued by local states, municipal councils or regional councils.
However, the impact that such bonds have geo-politically is almost insignificant, and the bond type that has been affecting the whole globe with higher insurgence rates would be government bonds.
Numbers Game Played Within Government Bonds
Understanding a bond as a transaction that happens between a corporation and an investor is rather an incomplete statement, nonetheless, redefining it as a situation where an investor lends a loan to a certain corporation is a more precise definition.
Furthermore, what makes a bond market is the practice of buying and selling debt instruments issued by different units. The significance of debt instruments from equity instruments would make it easier to distinguish its inter-relations with national governments.
Debt instruments are unique since;
- Issuing a bond can increase the debt burden of the bond issuer because contractual interest payments must be paid – unlike dividends, they cannot be reduced or suspended.
- Bondholders do not gain ownership in the business or have any claims to the future profits of the borrower. The borrower’s only obligation is to repay the loan with interest.
- Bond market returns are less volatile than stock market returns.
The principal reason for governments to raise bonds is to improve infrastructure and improve living standards of their citizens. The numbers game of government bonds can be simply explained with interest-rate risks – the tendency for an investment loss that can be caused by an upward movement in the current rates for new debt instruments.
Interest-rate risk usually take place when interest rates rise, which is why only select bonds keep up with inflation, which is a measure of price increases throughout the economy.
If a fixed-rate government bond pays 2% per year, for example, and prices in the economy rise by 1.5%, the investor is earning only 0.5% in real terms.
Even thou that simple math doesn’t seem to be like a numbers game, it has the ability to make magnificent differences in the bond market.
Government Bond Predictions
It seems that the average person is much more aware of the equity (stock) market than of the debt market. Yet, the debt market is the much larger of the two. For example, in September 2005, about $218 billion of new corporate bonds were issued, as compared to slightly under $18 billion in new corporate stocks.
The below graph compares the issued corporate bonds and corporate stocks in the last decade within USA.
Another way to compare the size of the two markets is to think about total amounts of debt and equity instruments outstanding at the end of a particular period.
According to “Flow of Funds” data of March 2006, published by the Board of Governors of the Federal Reserve System for the fourth quarter of 2005, there was approximately $34,818 billion in outstanding debt instruments and about $18,199 billion in outstanding corporate equities. Thus, the size of the debt market as of the last quarter of 2005 was about twice that of the equity market.
Specialty of Bonds
After all the explanations supported by data and statistics one would still ask the question “Why would a corporation issue bonds instead of just borrowing from a bank?”
Companies typically pay bondholders an interest rate that is lower than the interest rate offered by banks. Minimizing interest is a crucial factor because businesses are in business to make corporate profits. That is one of the explanations for why stable businesses that don’t appear to require the money frequently issue bonds. Corporations can invest in growth and other projects thanks to the availability of huge loans with cheap interest rates.
The future of indebtedness lies in the hands of the bond market, which is approaching USD 46 trillion as this piece is being browsed online.
First world national governments usually pump this market for various reasons;
- Lending loans can help them secure resources out of the country – Handing bonds to third world countries can come in handy for first world governments since fixed-rate government bonds can demand an asset from the corporate (third world country in this case).
- Beating other markets helps them build trust – Bond market has managed to top other markets by outperforming them continuously, therefore a government bond can be classified as one of the strongest debt instruments.
Governments tend to find bond markets resourceful compared to any of their utilities due to all the benefits it can provide with.
