Fixed Income Markets

The fixed income market encompasses all debt instruments where borrowers issue securities in exchange for capital, promising to repay principal plus interest. This market dwarfs equity markets in size and serves as the foundation for pricing financial assets across the economy.

Government Securities: Sovereign debt represents borrowing by national governments. US Treasury securities are considered the global 'risk-free' benchmark, with instruments ranging from short-term Treasury Bills (maturities under one year) to long-term Treasury Bonds (20-30 years). The yield curve—plotting interest rates across maturities—serves as a critical economic indicator, with inversions (when short-term rates exceed long-term rates) historically preceding recessions.

Corporate Bonds: Companies issue debt with varying credit quality, from investment-grade bonds (lower yield, lower risk) to high-yield or 'junk' bonds (higher yield, higher risk). For example, when Apple issued $17 billion in bonds in 2013, it secured funding at lower rates than many governments due to its strong financial position.

Municipal Bonds: State and local governments issue these securities to fund infrastructure and services, often with tax advantages for investors. For instance, a city might issue bonds to finance a new bridge, with interest payments exempt from federal income tax.

Mortgage-Backed Securities (MBS): These instruments represent claims on pools of mortgage loans, transforming illiquid assets (individual mortgages) into tradable securities. The 2008 financial crisis highlighted the systemic risks when these complex instruments are mispriced or misunderstood.

Trading Dynamics: Unlike equities, most fixed income instruments trade over-the-counter (OTC) rather than on centralized exchanges. This creates a dealer-intermediated market with potentially less transparency and price discovery. Electronic trading platforms have increased in prominence, though large institutional transactions still often occur through direct dealer relationships.

Key Metrics: Bond prices move inversely to yields—when interest rates rise, existing bond prices fall. Duration measures price sensitivity to interest rate changes (longer maturities generally have higher duration), while convexity captures the non-linear aspects of this relationship. Credit spreads—the yield premium over similar-maturity government bonds—reflect perceived default risk.

Central Bank Influence: Fixed income markets are significantly influenced by central bank policies. When the Federal Reserve conducts quantitative easing (QE), purchasing government bonds and sometimes corporate debt, it directly affects yields and liquidity across the entire fixed income landscape.