Overview of Global Fixed Income Markets | CFA Level I Fixed Income
Global bond markets can be classified by various characteristics, such as:
- Type of issuer
- Taxable status
- Credit quality
- Currency of issuance and interest
- Original maturity
- Coupon structure
Type of Issuer
There are three key segments of issuers:
- Government and government-related sector: This includes sovereign bonds, government-related entities, local governments, and agency bonds. Examples are US Treasuries, British gilts, World Bank bonds, and Fannie Mae bonds.
- Corporate sector: This comprises financial companies like HSBC and insurance companies, as well as non-financial companies such as McDonald’s and Tata Steel.
- Structured finance sector: This category includes bonds created by securitization, such as asset-backed securities and collateralized debt obligations.
Bonds can be classified as taxable or tax-exempt. For example, some municipal bonds issued by US state governments are tax-exempt.
Bonds can be classified based on their creditworthiness, as judged by credit rating agencies like Moody’s, S&P, and Fitch Ratings. Bonds with ratings of BBB- or above (or BAA3 for Moody’s) are considered investment grade, while those below are considered non-investment grade or “junk.”
Currency of Issuance and Interest
Bonds can be denominated in various currencies, such as US dollars, Euros, or British pounds. Issuers may issue bonds in currencies other than their home country’s currency to tap into a larger international market of investors. The currency denomination influences which country’s interest rates affect the bond’s price.
Bonds can be classified as domestic bonds, foreign bonds, or Eurobonds, depending on the market in which they are issued.
Fixed-income securities can be classified by their original maturity at issuance. Securities with an original maturity of one year or less are money market securities, while those with a maturity longer than one year are capital market securities.
EXAMPLE: McDonald’s has issued bonds in US dollars, Euros, Pounds, and Japanese yen. HSBC has issued bonds mainly in Euros and US dollars. Tata Steel has also issued bonds in US dollars.
Emerging vs Developed Markets
Bonds can also be classified as emerging market bonds or developed market bonds. Emerging markets have less-established capital markets and are typically viewed as riskier than developed market bonds, leading to higher yields.
Government Bonds and Related Entities
Here are some examples of government and government-related bonds:
- Sovereign bonds: Issued by national governments, such as US Treasuries or British gilts.
- Supranational bonds: Issued by supranational organizations like the World Bank.
- Local government bonds: Issued by non-sovereign governments, like municipal bonds in the US.
- Agency bonds: Issued by government agencies, such as Fannie Mae bonds.
Structured Finance Sector
Structured finance bonds are created through securitization, a process that transforms private transactions, like mortgages, into securities traded in public markets. Examples include:
- Asset-backed securities: Bonds backed by a pool of assets, such as mortgages, car loans, or credit card receivables.
- Collateralized debt obligations: Bonds backed by a diversified pool of debt, such as corporate bonds, loans, or asset-backed securities.
Short-Term Debt Instruments
There are various short-term debt instruments with maturities of one year or less, such as:
- US Treasury bills (T-bills): Short-term government debt with maturities of up to one year.
- Commercial paper: Unsecured short-term debt issued by corporations.
- Negotiable certificates of deposit (CDs): Bank-issued debt instruments with maturities of up to one year that pay interest at maturity.
Medium-Term and Long-Term Debt Instruments
Debt instruments with maturities longer than one year include:
- US Treasury notes (T-notes): Government debt with maturities between 1 and 10 years.
- US Treasury bonds (T-bonds): Government debt with maturities of more than 10 years.
- Medium-term notes: Corporate debt securities with maturities ranging from 9 months to 100 years.
Inflation-linked bonds have cash flows determined by inflation rates. Examples include:
- Treasury Inflation-Protected Securities (TIPS): US government bonds with principal values adjusted for inflation based on the Consumer Price Index (CPI).
- Government-issued inflation-linked bonds: Issued by other governments and government-related entities.
- Corporate inflation-linked bonds: Issued by high-credit-quality corporations.
In conclusion, understanding the various classifications of global fixed income markets is essential for investors seeking to navigate the complex world of bonds.