Bonds and other types of fixed income securities like bank loans are almost always also traded "over-the-counter" or OTC rather than on a stock exchange. The phrase "over-the-counter" is used to refer to stocks, debt securities and other financial instruments that trade via a dealer network as opposed to on a centralized exchange. Because of the complexity of bonds, with each bond issuance containing a different set of terms, it would be difficult to trade bonds on a national exchange. Most bonds are also thinly traded, which also makes it more difficult to trade them on an exchange. Keep in mind that many bond investors will buy a bond when it is issued and then hold it until maturity, which means that the bond market will never be as actively traded as the stock market. So bonds are primarily traded OTC.
As explained in our article about the U.S. stock market, there are a small number of bonds that are publicly traded on an exchange. We call those bonds "exchange traded debt". But exchange traded debt is a very minor portion of the overall U.S. bond market.
How big is the U.S. bond market? We don't have good data on that ourselves because bonds on not traded on an exchange, and we don't maintain individual bonds in our database.
SIFMA, the Securities Industry and Financial Markets Association, compiles an annual Fact Book with tons of data about U.S. financial markets. According to SIFMA's 2017 Fact Book, here is a summary of the U.S. bond market:
|Bond Type||$ Outstanding Billions||% Share of Market|
|Asset backed securities||$1,329.8||3.5%|
|Federal agency securities||$1,971.7||5.1%|
Note that in rough terms the U.S. bond market is a little smaller in size than the stock market.
Every bond that get issued is given a "credit rating" by one or more of the three large U.S. bond ratings companies:
The ratings are designed to give investors an idea as to the risk involved with the bond. How likely is it that the issuing company will default on the bond? Each rating agency uses a slightly different system, but basically each bond is rated on a scale from bad to good that involves 15 to 20 possible ratings. See the ratings in our article about bond ratings
The bond ratings described above are used to group all bonds into one of two broad categories: "investment grade" or "high yield". These groupings are very important. Many conservative investors will only buy investment grade bonds. And investors' appetites to buy high yield bonds, which are much riskier, can vary as economic conditions change. So investment grade bonds and high yield bonds act quite differently. High yield bonds of course pay higher rates of interest, but with a higher default rate.
There are fourteen types of bonds that you need to be aware of:
By far, the most widely tracked bond index is the Bloomberg Barclays US Aggregate Bond Index. This index measures the taxable, fixed rate, investment grade bond market:
By far the most number of publicly traded bonds are municipal bonds. There are literally 200,000+ available:
|Index||Category||# of bonds||Action|
|S&P Municipal Yield Index||Tax-exempt high yield municipal bonds over $5 million||24,507||Analyze|
|S&P Municipal Bond Investment Grade Index||Tax-exempt investment grade municipal bonds over $2 million||183,784||Analyze|
|S&P Taxable Municipal Bond Index||Taxable investment grade municipal bonds over $1 million||25,118||Analyze|
All data is a live query from our database. The wording was last updated: 04/14/2020.
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