bond market

Bond Market: Next Big Investment Vehicle In India
Line of differential treatment is very much visible in Bond market with respect to equity market. Indian equity market has shown some encouraging growth in the last decade, the Indian debt market has continued to remain sluggish. In an environment where India is keen to attract foreign investments, it will be imperative to develop the secondary market for debt.
Bond market refers to the environment in which the issuance and trading of debt securities occurs. The bond market primarily includes government-issued securities and corporate debt securities, and facilitates the transfer of capital from savers to the issuers or organizations requiring capital for government projects, business expansions and ongoing operations. The Indian Debt Markets with an outstanding issue size of close to Rs.14640 Billion (or Rs. 14,64,000 Crores) and a secondary market turnover of around Rs 28500 Billion (in 2005) is the largest of the Indian financial markets. For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.
But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the values of existing bonds fall, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes.
Economists' views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of "in-line" data. If the economic release differs from the consensus view the market usually undergoes rapid price movement as participants interpret the data. Uncertainty (as measured by a wide consensus) generally brings more volatility before and after an economic release. Economic releases vary in importance and impact depending on where the economy is in the business cycle
For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.
But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the values of existing bonds fall, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes.
The Securities Industry and Financial Markets Association (SIFMA) classifies the broader bond market into five specific bond markets.
Government & Agency Bond
A government bond is a bond issued by a national government denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as bonds. Government bonds are usually referred to as risk-free bonds, because the government can raise taxes or simply print more money to redeem the bond at maturity Some counter examples do exist where a government has defaulted on its domestic currency debt, such as Russia in 1998 (the "rouble crisis"), though this is very rare.


Municipal Bond
A municipal bond (or muni) is a bond issued by a city or other local government, or their agencies. Potential issuers of municipal bonds include cities, counties, redevelopment agencies, school districts, publicly owned airports and seaports, and any other governmental entity (or group of governments) below the state level.
Corporate Bond
A Corporate Bond is a bond issued by a corporation. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.)
Asset Backed Bond
An asset-backed security is a type of debt security that is based on pools of assets, or collateralized by the cash flows from a specified pool of underlying assets. Assets are pooled to make otherwise minor and uneconomical investments worthwhile, while also reducing risk by diversifying the underlying assets. Securitization makes these assets available for investment to a broader set of investors. These asset pools can be made of any type of receivable from the common, like credit card payments, auto loans, and mortgages, to esoteric cash flows such as aircraft leases, royalty payments and movie revenues. Typically, the securitized assets might be highly illiquid and private in nature.
Mortgage Backed Bond
A mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans.
However not all securities backed by mortgages are considered mortgage-backed security (MBS). Housing Bonds (Mortgage Revenue Bonds) are backed by the mortgages which they fund, but aren't classified as mortgage-backed security (MBS).
Collateralized debt obligations
Collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product. CDOs are constructed from a portfolio of fixed-income assets. These assets are divided into different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated).
How We Measure Bond Market performance?
A bond market index is a listing of bonds or fixed income instruments and a statistic reflecting the composite value of its components. It is used as a tool to represent the characteristics of its component fixed income instruments. They differ from stock market indices in their complexity.A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks.
Bond Market in Indian Scenario
India’s economy has expanded an average of about 8.5% annually for the past 4 years, driven by rising productivity and investment. After rising sharply in early 2007, inflation has ebbed, and the current account deficit has moderated. India’s bright prospects have attracted record capital inflows, even amid heightened global uncertainty and slowing growth in the United States (US).The Indian financial system is now in a process of rapid transformation marked by strong economic growth, increased market robustness, and a considerable increase in efficiency. Bank and financial intermediation, however, remain undeveloped with respect to lending and deposits, and most banks remain largely controlled by public sector institutions, limiting the development of a true credit culture, the skills to assess credit risks, and a willingness to accommodate any but the lowest risk borrowers.

India has developed a world-class equities market from relatively unpromising beginnings. Since 1996, the ratio of equity market capitalization to GDP has more than trebled to 108%, from 32.1% in 1996. During the same period the banking sector expanded to 78.2% of GDP from 46.3%. In contrast, the development of government and corporate bond markets has not been so fast: the bond market grew to a more modest 43.4% of GDP, from 21.3%. In June 2007, the government bond market represented 38.3% of GDP, compared with the corporate bond market, which amounted to just 3.2% of GDP.
As the major portion of Indian debt market is covered by GOI bonds and it seems it has been attaining a saturation state of development, there is evident need of boosting corporate bond market. Keeping expected reforms from Indian government in the field of Bond market and related financial policies suitable to nurture the same.