Investment In The Different Bond Markets

Investing in a variety of bonds or securities is a smart way to diversify your investment portfolio. There are many different bond investment opportunities to meet your financial goals and objectives.

A bond is a debt security. This is essentially the same as an I.O.U. When a bond is purchased, you are lending money to an entity such as a  corporation, government, federal agency, or municipality. These entities are known as the issuer of the bond. The issuer provides you with a bond and promises to pay you a specific interest rate during the life of the bond and to pay you the face value of the bond, known as the principal, when the bond reaches maturity.

The types of bonds that are available for investment include corporate bonds, government bonds, municipal bonds, international bonds, asset-backed and mortgage-backed securities.

Corporate Bonds

Corporate bonds are issued by corporations for raising capital and cash flow for operations. Corporate debt is issued by a wide variety of corporations involved in the financial, industrial, and service-related industries. There is about $6.7 trillion in corporate debt currently outstanding.

Municipal Bonds

Municipal bonds, also known as Munis, are issued by cities, counties, states and other governmental entities to raise money to build projects for the public. These tend to include schools, highways, hospitals, and waste water systems. Municipal bonds are the most important way that U.S. state and local governments borrow money to finance their capital investment and cash flow needs.

One thing to remember about the municipal bond market is that the interest on most municipal bonds are exempt from federal income taxes. So when you look for municipal bond investment opportunities, look for tax free municiapl bonds. The implied subsidy which is offered by the federal government allows municipal issuers to compete for capital in the domestic securities market. Currently, there is an excess of $2.67 trillion in outstanding municipal debt.

Treasury Bond and Securities Market

The United States Treasury bond and securities market is the largest and most liquid market in the world. Currently, there is $7.9 trillion in outstanding marketable Treasury debt. The U.S. Treasury issues three types of securities: Treasury bills, which have a maturity of less than 1 year; Treasury notes, which have a maturity of between one and 10 years; and Treasury bonds, which have a maturity of greater than 10 years.

Federal Agency Securities Market

Federal agency debt is issued by various government-sponsored enterprises (GSEs) that were created by Congress to fund loans to borrowers such as farmers, homeowners, and students.

By creating the GSEs, the U.S. government addressed various public policy concerns about the ability of members of these groups to borrow sufficient funds at affordable rates. Most GSEs rely on debt financing for their day-to-day operations.

Some of the most active issuers of agency debt securities are include the Federal Farm Credit System Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation (Freddie Mac), Federal National Mortgage Association (Fannie Mae), and Tennessee Valley Authority (TVA). Currently, there is an estimated $3.14 trillion in agency debt outstanding.

Money Markets

Money markets include bankers acceptances, certificates of deposit (CDs), and commercial paper. These three markets account for an estimated $3.9 trillion in outstanding debt.

Bankers acceptances are most often used to finance international transactions in goods and services.

Certificates of deposit (CDs) are large denomination negotiable time deposits issued by commercial banks and thrift institutions, and are currently about $2.2 trillion.

Commercial paper, which is short term unsecured promissory notes issued by both financial and non-financial corporations, is about a $1.7 trillion market.

Asset-Backed Securities

Asset-backed securities, also known as ABS, are bonds or notes backed by financial assets. These assets consist of receivables other than mortgage loans, such as auto loans, credit card receivables, manufactured-housing contracts and home-equity loans. At the present time, there is about $2.6 trillion in outstanding debt.

Mortgage Securities Market

Mortgage securities represent an ownership interest in mortgage loans made by financial institutions (commercial banks, mortgage companies, or savings and loans) to finance the borrower's purchase of a home or other real estate.

Mortgage securities are created when these loans are put together by issuers or servicers for sale to investors. As the mortgage loans are paid off by the homeowners, the investors receive payments of interest and principal.

The majority of mortgage securities are issued and/or guaranteed by an agency of the U.S. Government, the Government National Mortgage Association (Ginnie Mae), or by government-sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

There are some private institutions, such as subsidiaries of investment banks, financial institutions, and home builders, that also package various types of mortgage loans and mortgage pools. The securities they issue are known as "private-label" mortgage securities, in contrast to "agency" mortgage securities issued and/or guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac. Currently, there is an estimated $8.86 trillion in outstanding mortgage-related securities.