Bond markets are bigger than equity markets, but most candidates know them less well. Master the segments, the issuers and investors, the index types, and how primary and secondary trading differ from stocks.
Fixed-income markets are segmented by who borrows. Five segments matter for the exam.
- Sovereign government. National governments issuing in their own currency (US Treasuries, UK Gilts, JGBs). Lowest credit risk in home currency. Sets the risk-free benchmark curve.
- Non-sovereign government. States, provinces, municipalities, agencies. US munis, German Länder, US agency debt (Fannie, Freddie, Ginnie). Tax features often distinguish them.
- Supranational. Multilateral entities (World Bank, IMF, EIB, ADB). Funded by member states. High credit quality.
- Corporate. Split into financial issuers (banks, insurers) and non-financial issuers (industrials, utilities). Investment grade and high yield are the two credit tiers.
- Securitized (structured). Asset-backed securities, mortgage-backed securities, CLOs, CMBS. Pools of loans repackaged and sold in tranches.
KEY: Securitization moves loans off the originator's balance sheet to a special purpose entity. The SPE issues bonds backed by cash flows from the pooled loans.
Common mistakes
- Confusing bond and equity primary mechanics. Sovereigns auction, equities never auction in primary issuance. Trap answer: "Treasuries use book-building like an IPO." They use single-price auctions.
- Assuming bond secondary markets are exchange-traded. The vast majority of bond volume is OTC. Trap: "TRACE is a bond exchange." TRACE is post-trade reporting, not an exchange.
- Forgetting that bond indexes are weighted by amount outstanding. This rewards the largest debtor. Trap: assuming bond indexes weight by issuer fundamentals or credit quality.
Bottom line
- Issuer segments: sovereign, non-sovereign government, supranational, corporate (financial and non-financial), and securitized (issued by SPEs)
- Investor base is institutional-dominant: central banks, pensions, insurers, sovereign wealth funds, mutual funds, banks, hedge funds
- Index types: broad market, sector, style (maturity, credit, currency), custom/strategy. Most are weighted by amount outstanding, creating the bums problem
- Primary issuance: underwritten offerings, auctions, shelf takedowns, private placements. Equities rely on underwritten IPOs
Exam shortcut
Memorize five segments (sovereign, non-sovereign, supranational, corporate, securitized) and one matching investor for each. For indexes, recall four types and the amount-outstanding weighting rule. For primary vs. secondary, lock in two contrasts: sovereigns auction (bonds, never equities) and bonds trade OTC (equities trade on exchanges). If a question mentions TRACE, the answer involves post-trade reporting, not exchange listing.
The full lesson (about 1,910 words, 13 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- issuance and trading
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