Global Bond Markets

Global bond markets can be classified by several bond characteristics, including type of issuer, credit quality, maturity, coupon, currency, geography, indexing, and taxable status.

Type of issuer

Common classifications are households, nonfinancial corporations, governments, and financial institutions. In developed markets, the largest issuers by total value of bonds outstanding in global markets are financial corporations and governments. In emerging markets, nonfinancial corporations are the largest issuers.

Credit quality

Standard & Poor’s (S&P), Moody’s, and Fitch all provide credit ratings on bonds. For S&P and Fitch, the highest bond ratings are AAA, AA, A, and BBB, and are considered investment grade bonds. The equivalent ratings by Moody’s are Aaa through Baa3. Bonds BB+ or lower (Ba1 or lower) are termed high-yield, speculative, or “junk” bonds. Some institutions are prohibited from investing in bonds of less than investment grade.

Original maturities

Securities with original maturities of one year or less are classified as money market securities. Examples include U.S. Treasury bills, commercial paper (issued by corporations), and negotiable certificates of deposit, or CDs (issued by banks). Securities with original maturities greater than one year are referred to as capital market securities.

Coupon structure

Bonds are classified as either floating-rate or fixed-rate bonds, depending on whether their coupon interest payments are stated in the bond indenture or depend on the level of a short-term market reference rate determined over the life of the bond. Purchasing floatingrate debt is attractive to some institutions that have variable-rate sources of funds (liabilities), such as banks. This allows these institutions to avoid the balance sheet effects of interest rate increases that would increase the cost of funds but leave the interest income at a fixed rate. Thevalue of fixed-rate bonds (assets) held would fall in the value, while the value of their liabilities would be much less affected.

Currency denomination

A bond’s price and returns are determined by the interest rates in the bond’s currency. The majority of bonds issued are denominated in either U.S. dollars or euros.

Geography

Bonds may be classified by the markets in which they are issued. Recall the discussion in the previous reading of domestic (or national) bond markets, foreign bonds, and eurobonds, and the differences among them. Bond markets may also be classified as developed markets or emerging markets. Emerging markets are countries whose capital markets are less well-established than those in developed markets. Emerging market bonds are typically viewed as riskier than developed market bonds and therefore have higher yields. In most emerging markets, and some developed markets, publicly traded debt securities are chiefly issued by governments. Investors who want exposure to private sector debt in these markets can obtain it indirectly by investing in financial institutions that lend to private sector borrowers.

Indexing

As discussed previously, the cash flows on some bonds are based on an index (indexlinked bonds). Bonds with cash flows determined by inflation rates are referred to as inflationindexed or inflation-linked bonds. Inflation-linked bonds are issued primarily by governments but also by some corporations of high credit quality.

Tax status

In various countries, some issuers may issue bonds that are exempt from income taxes. In the United States, these bonds can be issued by municipalities and are called municipal bonds, or munis.