Bond Market 101

Joshua Dawe
Jul 17
5 min read

Updated: Aug 3

Bonds may not generate the same excitement as a buzzy new stock IPO, but they quietly keep the global financial system humming. With an estimated $140 trillion in outstanding debt worldwide, the bond market is bigger than the world’s stock markets, and every government, corporation, and investor relies on it in some way. In the past few years, bonds have come back into the spotlight. After a decade of ultra-low interest rates, surging inflation since 2021 has pushed central banks to hike rates sharply, driving yields to multi-year highs. This overview unpacks who participates in the bond market, what bonds are and how they work, where the biggest markets are, how bonds developed over time, and why they’re essential to the economy and your portfolio.

Who's involved?

The global bond market is a vast ecosystem with many players.

Issuers include national governments, local municipalities, corporations, and supranational institutions like the World Bank. Governments issue sovereign bonds to fund everything from schools and roads to stimulus programs. Corporations tap the bond market to expand operations, acquire competitors, or refinance debt without giving up ownership like they would by issuing new stock.

Underwriters and Intermediaries, like investment banks, structure bond deals and sell them to investors. In secondary markets, broker-dealers and banks help trade bonds and keep markets liquid.

Investors are mainly large institutions such as pension funds, insurance companies, mutual funds, and banks. They hold the majority of outstanding bonds. Retail investors also participate, but often indirectly through bond funds or ETFs. Bonds are prized for providing steady income and portfolio diversification.

Credit Rating Agencies such as Moody’s, S&P, and Fitch assess how risky a bond is. A higher credit rating means lower default risk but also lower yields. Riskier issuers have to offer higher yields to attract buyers.

Governments and central banks are also major market participants, not just as issuers, but as investors and policymakers who monitor and influence bond markets.

What are they?

A bond is essentially a tradable IOU. When you buy a bond, you’re lending money to the issuer in exchange for regular interest payments (the coupon) and the return of your principal at maturity. Most bonds have a face value (say $1,000), a fixed coupon rate, and a set maturity date.

There are many types of bonds:

Government Bonds such as U.S. Treasuries, UK Gilts, or German Bunds are generally the safest within their local currency and form the benchmark for the “risk-free” rate.
Corporate Bonds help companies raise capital and range from safe investment-grade debt to riskier high-yield or “junk” bonds.
Municipal Bonds are issued by cities, states, or local districts. In the U.S., they often come with tax perks for investors.
Mortgage-Backed and Asset-Backed Securities bundle loans like mortgages or car loans into tradable bonds.
Emerging Market Bonds are issued by developing countries or companies and can offer higher returns but come with political and currency risks.
ESG and Green Bonds are relatively new but booming as they fund environmentally and socially sustainable projects.

Key concepts include the coupon rate, which is the annual interest paid on the bond’s face value; the yield, which is your actual return that adjusts with the bond’s price in the market; the maturity, which is when you get your money back; and duration, which measures how sensitive a bond’s price is to changes in interest rates.

Where are they?

Bond markets are truly global. The United States has the largest share, accounting for about 35 to 40 percent of global bonds, driven by massive Treasury issuance and a robust corporate bond market. U.S. Treasuries are seen as the ultimate safe haven, and their yields set the tone for borrowing costs worldwide.

Europe is also a bond giant. The Eurozone’s sovereign debt market is deep and diverse with German Bunds, French OATs, and Italian BTPs making up a significant slice of the global fixed-income landscape. London has long been a hub for international bond issuance and the UK’s Gilts market is one of the largest.

Japan has a huge bond market too. Japanese Government Bonds (JGBs) total trillions of dollars, though yields have historically hovered near zero due to decades of low inflation. China, meanwhile, has rapidly grown into the world’s second-largest bond market, with local and international investors increasingly participating through programs like Bond Connect.

Beyond these major hubs, emerging markets such as Brazil, Mexico, India, and South Africa issue sovereign and corporate bonds that often offer higher yields but come with higher risks.

Unlike stocks, bonds mostly trade over-the-counter through dealer networks rather than on a single exchange. Large institutional investors use electronic trading platforms like Tradeweb or MarketAxess to buy and sell bonds, while settlement is handled by clearing systems such as Euroclear and DTCC.

When did they develop?

Bonds have ancient roots. The earliest known bond dates back to around 2400 B.C. in Mesopotamia as a form of surety for grain delivery. Medieval Venice popularized perpetual war bonds called prestiti in the 12th century, which could be traded among investors, creating an early version of a secondary bond market.

The first modern government bonds emerged in the 17th century. In 1693, the newly formed Bank of England issued the first perpetual government bond to fund a war with France. The United States issued its first significant bonds during the American Revolution and later sold “Liberty Bonds” to finance World War I.

The 20th century saw huge growth in bond markets. Supranational institutions like the World Bank began issuing bonds, the Eurobond market took off in the 1960s, and innovations like mortgage-backed securities emerged in the 1980s. By the 2010s, interest rates fell to historic lows, with some European and Japanese bonds even sporting negative yields. Recent years have marked a reversal, with inflation driving rates and yields higher again.

Why do we use them?

Bond markets exist because they efficiently match borrowers with investors. Governments can fund budgets and infrastructure without having to raise taxes overnight. Corporations get capital for growth without giving up ownership. Investors gain steady income, portfolio diversification, and relative stability compared to stocks.

Bonds also play critical roles behind the scenes. Highly rated government bonds act as safe havens and help manage risk during times of market stress. They are widely used as collateral in financial transactions and serve as the foundation for monetary policy. Central banks buy and sell bonds to manage the money supply and steer interest rates.

Bond markets also keep governments and companies in check. If an issuer takes on too much debt or loses investor confidence, its borrowing costs go up, signaling increased risk. This market discipline encourages responsible fiscal management.

In short, the bond market is the plumbing of the financial world. It may not always be flashy, but it is indispensable.

Understanding bonds is about more than just collecting interest payments. It’s about seeing how the world’s biggest pool of capital connects savers and borrowers, stabilizes markets, and shapes the cost of money itself. Recent trends, from higher yields to the rapid rise of green bonds, show that bond markets continue to adapt. For investors, the takeaway is simple: bonds belong in any balanced portfolio, offering income, diversification, and a more predictable ride when markets get rough.

Sources

Securities Industry and Financial Markets Association (SIFMA) – Capital Markets Fact Book 2024
Bank for International Settlements (BIS) – Quarterly Reviews 2023 & 2025
Investopedia – Various articles on bond market participants, mechanics, and monetary policy
Wikipedia – Bond Market History
World Bank Group Archives – Timeline of supranational bond issuance
U.S. Bank – Investing Insights: Bonds and Portfolio Diversification
ICMA – Bond Market Size 2020
Britannica – Bond Duration: Price, Yield, and Time to Maturity