The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2008, the size of the international bond market is an estimated $67.0 trillion, of which the size of the outstanding
early all of the $923 billion average daily trading volume (as of early 2007) in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges.
References to the "bond market" usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.
Market Structure
Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger.
However, the New York Stock Exchange (NYSE) is the largest centralized bond market, representing mostly corporate bonds. The NYSE migrated from the Automated Bond System (ABS) to the NYSE Bonds trading system in April 2007 and expects the number of traded issues to increase from 1000 to 6000.
Besides other causes, the decentralized market structure of the corporate and municipal bond markets, as distinguished from the stock market structure, results in higher transaction costs and less liquidity. A study performed by Profs Harris and Piwowar in 2004, Secondary Trading Costs in the Municipal Bond Market, reached the following conclusions: "Municipal bond trades are also substantially more expensive than similar sized equity trades. We attribute these results to the lack of price transparency in the bond markets. Additional cross-sectional analyses show that bond trading costs decrease with credit quality and increase with instrument complexity, time to maturity, and time since issuance." "Our results show that municipal bond trades are significantly more expensive than equivalent sized equity trades. Effective spreads in municipal bonds average about two percent of price for retail size trades of 20,000 dollars and about one percent for institutional trade size trades of 200,000 dollars”.
