Bond Markets

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U.S. President Donald Trump has not only disrupted international trade rules but has also sought to challenge the independence of the U.S. Central Bank (Federal Reserve).

About Bond Market

• The bond market is a financial marketplace where investors buy and sell debt securities, primarily bonds, issued by governments, corporations, or institutions.

About Bonds and Inflation Impact

• A bond is a financial instrument that promises a fixed return (face value) at the end of a specific period, unlike equity, which has no fixed term or guaranteed returns.
• Bonds are generally safer investments used to hedge against risks or act as a store of value.
• Bond yields are inversely proportional to their market price: when prices fall, yields rise.
• Inflation erodes the real returns from bonds. If inflation exceeds bond yield, investors lose purchasing power.
• When inflation expectations rise, the Central Bank typically raises interest rates, causing bond prices to fall and yields to rise, impacting investment decisions across the economy.
• Currency depreciation also impacts foreign bondholders negatively, reducing their real returns when converting back to their home currency.

About the Indian Bond Market

• The Indian Bond Market is a vital segment of the financial system where government entities, corporations, and financial institutions raise funds by issuing bonds.
• Investors provide loans to the issuers and, in return, receive periodic interest payments and principal repayment upon maturity.

Structure of the Indian Bond Market

• Primary Bond Market: In the Primary Market, new bonds are issued by the government, corporations, or financial institutions to raise capital.
  • Government Securities (G-Secs): Bonds issued by Central and State Governments, including Treasury Bills (short-term) and Government Bonds (long-term).
  • Corporate Bonds: Bonds issued by private or public companies, credit-rated based on their creditworthiness.
  • Municipal Bonds: Issued by local governing bodies for funding public infrastructure projects.
  • Public Sector Undertaking (PSU) Bonds: Bonds issued by government-owned corporations.
  • Green Bonds: Dedicated bonds for financing environmentally sustainable projects.
  • Masala Bonds: Rupee-denominated bonds issued in foreign markets.
• Secondary Bond Market: In the Secondary Market, previously issued bonds are traded among investors.
  • Examples include instruments like Treasury Bills (T-Bills), Commercial Papers (CPs), and Certificates of Deposit (CDs).

Bond Markets FAQs

Q1. What is a bond market?
Ans. The bond market is a financial marketplace where investors buy and sell debt securities, primarily bonds, issued by governments, corporations, or institutions.

Q2. What are government securities (G-Secs)?
Ans. Government securities (G-Secs) are bonds issued by a government to borrow money from the public, considered among the safest investments due to sovereign backing.

Q3. What is the difference between primary and secondary bond markets?
Ans. In the primary market, bonds are issued and sold for the first time; in the secondary market, investors trade existing bonds among themselves.

Q4. Who regulates the bond market in India?
Ans. The Reserve Bank of India (RBI) regulates the government bond market, while the Securities and Exchange Board of India (SEBI) regulates corporate bond markets.

Source: TH