About the Key Players in the U.S. Bond Market
The key players in the U.S. bond market work in a system that trades debt securities. Various governments, institutions and banks play a significant role in issuing and purchasing this debt. Because bonds come in many varieties, different players have specialized in different facets of the market, from small community banks to large firms on Wall Street.
Other People Are Reading
-
Function
-
The U.S. bond market deals in debt securities traded by broker-dealers in an over-the-counter market, between two individuals or institutions. Corporate securities are usually listed on exchanges and can be purchased in a manner similar to purchasing stocks.
Due to the lack of credit risk, and an inverse relationship to interest rates, the bond market can usually identify changes in the yield curve, the time it takes for a bond to mature. Large financial institutions have successfully made trading debt securities a profitable business for decades.
Size
-
The U.S. bond market accounts for approximately $25 trillion in assets, with a daily trading volume of $923 billion. The New York Stock Exchange has become the world's largest centralized market for bonds, working mostly with corporate securities. Millions of individuals are employed in the many segments of the market, most notably by Morgan Stanley, Bank of America and Goldman Sachs.
-
Types
-
The Securities Industry and Financial Markets Association has classified the bond market into five types of debt securities, each associated with the different players in the business:
Corporate securities, functioning on the level of supplying large businesses with capital for inventory, programs and operations.
Government bonds, which primarily fund social programs, defense initiatives and deficit spending. These are issued in dollars and have very little risk due to federal government backing.
Municipal bonds are issued by a local governments or institutions for revenue generation. They are usually tax exempt.
Mortgage-backed securities, or collateralized debt obligation, are unregulated debt that reflect assets of individuals and institutions and the resulting credit of those assets.
Funding bonds, which are a collection of bonds and other debt securities designed to allow a monthly dividend much like stocks.
Features
-
The bond market has three main bodies: issuers, underwriters and purchasers.
Issuers comprise mostly banks, the government and corporations. The government creates bonds to fund programs to run the country. Banks usually issue mortgage-backed securities for housing. And corporations issue debt to finance initiatives and operations.
Underwriters organize the securities by creating a prospectus to sell the bonds to the market. Investment banks are usually responsible for this procedure.
Purchasers are the final piece in the bond market, as they hold the debt securities. Governments, investment banks, corporations, individuals and other financial institutions all purchase this debt.
Significance
-
Most of the key players in the bond market have been in existence for decades. Investment banks Goldman Sachs, Morgan Stanley and Citigroup are the largest holders of debt securities. Fannie Mae and Freddie Mac, originally established by the government, have been the prime issuer and purchaser of mortgage-backed securities, holding almost half of the nation's mortgage debt. However, the U.S. government is positioned to buy out much of these collateralized debt securities. Various foreign governments, such as Japan, now hold a large percentage of U.S. bonds, thereby a significant portion of U.S. debt.
Investments into these companies are in tandem with the performance of these debt securities, as the yield curve changes as they mature. A company with poorly performing bonds can be a financial risk to traders in exchanges, as well as the issuers, underwriters and purchasers of the debt.
-
