Fixed-Income Issuance and Trading

Fixed-income instruments and markets are categorized by issuer type (sector), credit quality, and time to maturity. Additional classifications may include currency, geography, and ESG characteristics.

Fixed-income indexes track the returns of groups of securities that meet specific inclusion criteria. These indexes can be broad-based or narrow, focusing on specific criteria like issuer type, credit quality, and maturity.

Primary bond markets involve the issuance of new bonds by issuers to raise financing, while secondary bond markets involve the trading of existing bonds among investors.

Credit ratings are qualitative measures provided by credit rating agencies that assess the credit quality of issuers and their debt instruments. These ratings range from high investment grade (AAA) to default (D).

Different types of investors and issuers participate in the fixed-income markets based on their risk tolerance and financial needs. For example, government issuers typically have the highest credit ratings, while corporate issuers may vary widely in their credit quality.

Fixed-income indexes include a large number of bonds that meet specific eligibility criteria such as credit quality, maturity, and issuance size. This leads to a high number of constituents compared to equity indexes.

Due to the finite maturity of bonds and frequent new issuances, fixed-income indexes experience higher turnover and are rebalanced more often (typically monthly) to include new issues and remove ineligible bonds.

Similar to equity indexes which are weighted by market capitalization, bond indexes are usually weighted by the market value of the outstanding debt, reflecting changes in the bond market composition over time.

Fixed-income indexes can be aggregate, covering a wide range of bonds, or can be narrower, focusing on specific sectors, credit qualities, maturities, geographies, or ESG considerations.

Bond funds aiming to match specific index returns typically hold a representative sample of the index's constituents due to the complexity and large number of bonds in fixed-income indexes.

Primary fixed-income markets are where new bonds are issued by entities to raise capital. This can be through public offerings or private placements. Debut issuers often replace private debt with publicly issued bonds.

Secondary fixed-income markets involve the trading of existing bonds among investors. These markets are mostly over-the-counter and quote-driven, with liquidity varying widely across different segments and issuers.

Unlike equity markets where securities are often traded on exchanges, fixed-income securities are primarily traded over-the-counter. Equity issuances often involve a change from private to public ownership, while fixed-income issuances typically do not involve ownership or control rights changes.

Liquidity in fixed-income markets is indicated by the bid-offer spread, which can vary significantly. The most liquid bonds are typically the most recently issued, high-quality sovereign or corporate bonds.