The Primary Market: New Issuance
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When a government or company needs to raise money by issuing bonds, it does so in the primary market — the market for newly created securities. The most common mechanism for sovereign issuance is the auction.
The US Treasury holds regular auctions for bills (short-term), notes (2–10 years), and bonds (20–30 years). In a typical competitive auction, large banks and institutional investors submit bids specifying the yield they require; the Treasury fills the auction from the lowest yield upward until the full amount is sold. In the UK, the Debt Management Office (DMO) runs gilt auctions using a similar mechanism.
Corporate bonds are typically issued via a different route: the issuer hires one or more investment banks to underwrite the deal, marketing the new bonds to institutional investors through a process called a bookbuild before pricing is finalised.
The Secondary Market and How Bonds Trade
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Once issued, bonds trade in the secondary market. Unlike equities, most bonds do not trade on centralised exchanges. Instead, they trade over-the-counter (OTC) — directly between buyers and sellers (typically large institutions and dealers) through a network of telephone calls, messaging systems, and increasingly electronic platforms.
This makes the bond market less transparent than stock markets for retail investors. Prices are quoted as a percentage of par value: a bond quoted at 98 is trading at 98% of its face value, or £980 per £1,000 of face value. When a bond changes hands mid-coupon period, the buyer also pays accrued interest — the portion of the next coupon payment that has already built up since the last payment date. Settlement for most government bonds occurs on a T+1 or T+2 basis.
Bond Indices and Benchmarks
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Bond market performance is tracked through indices, just as equity performance is tracked through the S&P 500 or FTSE 100. The two most important are:
- Bloomberg Global Aggregate Index: the broadest investment-grade bond benchmark, covering government, corporate, and securitised debt across more than 70 countries.
- FTSE World Government Bond Index (WGBI): tracks sovereign bonds from major developed-market governments.
These indices are used both to measure performance and to construct passive bond funds and ETFs.
Who Owns the Bond Market
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Bond markets are dominated by large institutions, not retail investors. The main holders globally are:
- Pension funds and life insurers, which need long-dated, income-producing assets to match long-term liabilities.
- Central banks, which hold foreign government bonds as foreign exchange reserves (particularly US Treasuries) and have also purchased domestic bonds through quantitative easing programmes.
- Commercial banks, which hold government bonds as liquid assets.
The institutional character of bond markets means that individual retail investors typically gain exposure through bond funds or ETFs rather than by holding bonds directly.