An Introduction to the Bond Markets

Preface

In contrast to the equity markets, why is it that to the average private investor or non-bond market professional that bonds and the bond markets around the world are a closed book? This is surprising when you consider that:

• Bonds are intrinsically safer investments than equities.
• Bonds are usually easier to value than equities. After all, they often have predefined returns.
• The size of the bond markets and the trading of derivatives based on bonds between financial institutions is many, many times larger than that of the equity markets. Worldwide the size of the bond markets is measured in trillions of US dollars ($1 trillion = $1 000 000 000 000). For example, the repo markets (essentially a form of short-term secured borrowing using bonds as collateral) in Europe have a daily turnover in excess $1 trillion; the interest rate and currency swap markets have outstanding transactions with a nominal value in excess of $180 trillion, etc.

However, possibly the question has been put the wrong way round. We should possibly be asking, why are the equity markets so attractive? Many people like to have a gamble, and they regard the equity markets as an attractive place to do this. People like to think that they are able to assess the prospects of a company, presumably better than the market, and in the process make a fortune. Holding bonds, on the other hand, with their predefined returns, does not offer this possibility. After all, how many people are prepared to put £1 into ...