Bond Market Analysis

The analysis of the bond market is closely linked to the analysis of economic indicators. The bond market simply refers to the economic environment in which the issuance, buying, selling, and trading of debt securities (bonds) occurs. The bonds which make up the bond market are mainly government issued bonds, but also include corporate bonds. Most trading in the bond market is done over-the-counter through organized electronic trading networks. There are actually two markets: the primary market, through which bonds are issued and sold to the investors; and the secondary market, through which investors buy and sell bonds amongst themselves. Although it is the stock market which receives all the media attention, the bond market is actually many times bigger. And the bond market is more vital to the government and also to the ongoing operation of the public and the private sectors.

The main forces that move the bond market are within the economy. If the economy is doing badly or well, that affects the interest rates given at banks for loans. As the prime interest rates rise or fall, the bond market can move sharply as investors decide to change their bonds for longer or shorter term investments, or those paying higher yields.

Usually, if the government announces certain specific economic indicators, such as the unemployment percentages, or the prime lending rate, there will be a surge in the activity of the bond market. In particular, the market reacts most dramatically, through both price movements and trading activity, to the unemployment figures, the Producer Price Index, the federal funds target rates, and Consumer Price Index announcements. The U.S. Treasury securities auction results are also found to have significant effects on both bond prices and bond trading activity. Moreover, the bond market's reactions depend on the unexpected component of a given announcement and on conditions of uncertainty. The greater the uncertainty of the investors leads to a stronger market response, particularly in the form of increased trading activity.

Professional analysis of the movements of the bond market is important to find out why there has been a movement, and if an investor should be concerned about the future earnings or value of his bonds.