How The Bond Market Works

Bonds are a very good form of investment because they are a low risk investment. A bond issued by the U.S. government is nothing more than an IOU the government writes you. You give the government the right to use your money, and in return you will get paid back with interest at a specified time, which is when the bond matures. You can think of a bond as a contract between you and the government. Savings bonds cannot be traded on the bond market, but Treasury Bonds can be traded just like stocks and mutual funds.

Shares of stocks are identical instruments that represent pieces of a company. Bonds are much different; they are IOUs. An investor might find it difficult to trade individual bonds, but if they have bond funds they have a much easier time of it. However, you can trade over-the-counter with through a dealer network. You can trade right from your computer, or you can do it over the phone.

The term "bond market" is an ambiguous term. There is no real bond market; bonds, such in bond funds are traded through an exchange. Treasury bonds are traded through a "futures market." When you trade Treasury Bonds and Notes you are buying and selling bonds with future value. You can get Treasury Bonds and Notes from your bank or you can get them online from Treasury Direct. The best way to get T-Bonds are to make a non-competitive bid; which means that you accept the interest rate that is given to the bond at the time of auction. The bond market, at auction, accepts both competitive and non-competitive bids. With competitive bids you decide what you will accept; competitive bidding is usually done by large corporations and professionals that understand the market.

The bond market opens when the auction process begins. The United States Treasury announces the bond auctions for the different kinds of bonds bills, and notes on the U.S. Treasury auction schedule. You can find this calendar by doing a search on your favorite search engine. You can also be directed to this calendar by visiting Treasury Direct. The non-competitive bids usually close at noon, and the competitive bids usually close an hour later Eastern Standard time.