What is “International Fixed Income Markets”?

The international fixed income market, also known as the international bond, debt, or credit market, is the term that captures all trades and the issuance of debt securities collectively. Corporate bonds relate to the securities issued by companies to fund their business expansion or specific projects, while sovereign bonds are issued by governments in order to raise capital for specific needs such as improvement in infrastructure or repaying previous debt. The issuance, purchases, and sales of these securities is executed via the international fixed income markets.

Key Learning Points

  • International fixed income market is the broader definition used to collectively address the marketplace where the execution of trades and issuance of new fixed income securities takes place
  • Government bonds (also known as sovereign bonds) are fixed income securities issued by national governments to fund specific projects or repay previous debt
  • Corporate bonds are issued by companies in order to raise capital for their business expansion or fund specific projects, for example the research for new products
  • There are two types of markets – primary, where all new issues are rolled out and secondary, which is the marketplace for already existing securities

Fixed Income Markets Basics

Unlike equities, which are traded on a centralized exchange, fixed income instruments are traditionally traded over-the-counter (or OTC).

There are two main types of fixed income markets – the primary and the secondary market. The primary market is mainly targeted at institutional investors who have the capacity to purchase large volumes of newly issued bonds. In the primary market, the trade occurs directly between the bond issuer and the buyer. These are newly created bond issues that have not been previously traded.

The secondary market offers investors the chance to purchase (sell) fixed-income securities that have already been sold (bought) on the primary market. Technically, this is executed through an intermediary who acts as a broker between the two parties involved in the trade.

In terms of the issuer of the bonds, these could be either a sovereign government that is seeking funds for its fiscal needs or a company that requires new capital. Government bonds are usually issued at auctions such as the US Treasury department’s bill auctions, but it is more common for retail investors to gain exposure through collective investment products such as mutual funds or exchange-traded funds (ETFs).

Advantages and Disadvantages

From an asset class perspective, bond prices tend to be less volatile compared to equities. In addition, bondholders have preference over shareholders in the event of insolvency, which also contributes to making bonds lower-risk investments. The international fixed income market offers a broad range of issuers and specific issues that investors can choose from. It is a fairly liquid market and investors could purchase or sell securities relatively easily.

Since fixed income instruments are deemed a lower risk, investors should expect lower potential returns too. Retail investors are usually more restricted in accessing the international bond markets as they do not have the required scale to purchase issues, unlike institutions. Last but not least, while relatively lower risk, fixed income securities are still exposed to both default and interest rate risk.

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