The market at a glance
Fixed income is the largest securities market on earth: over $130 trillion of bonds outstanding globally — government debt (~$65tn), corporate bonds, securitised products and more. It dwarfs equities in size while getting a fraction of the headlines, because bonds are where the price of money is set: every mortgage rate, corporate loan and equity valuation keys off this market.
The buyers are institutions with liabilities: pension funds and insurers matching future payouts, banks parking liquidity, central banks holding reserves (and, in QE eras, buying trillions), and bond funds aggregating everyone else. Trading is still largely OTC through dealers, though electronic platforms now handle most government-bond and a growing share of credit volume.
The three risks in every bond
- Rate risk (duration). Prices fall when yields rise — mechanically, unavoidably. Duration tells you how much: a duration-7 bond loses ~7% per 100bp yield rise. 2022 delivered the worst bond-market year in modern history purely through this channel.
- Credit risk (spread). Will the borrower pay? The extra yield over governments — the spread — prices default probability, recovery and bad-times correlation. See corporate bonds.
- Optionality. Many bonds contain embedded options — issuer calls, homeowner prepayments in MBS — that cap upside and demand option-adjusted analysis.
Reading the yield curve
Plot government yields by maturity: upward-sloping is normal (term premium), flat says late-cycle, and inversion — short yields above long — is the market's most famous recession signal, because it means the market expects rate cuts ahead. The curve's zero-coupon skeleton (see zeros) is the discount function every valuation in finance rests on.
How the products fit together
Government bonds set the risk-free baseline; corporates add credit spread; covered bonds add collateral to bank debt. FRNs delete duration and keep credit; linkers swap nominal certainty for purchasing-power certainty. Securitisation (MBS, ABS) manufactures bonds out of loan pools, sorted into risk tranches.
Concepts to master
Price and yield are the same fact in two languages — internalise the inverse relation until it's reflex. Duration is your position: portfolio managers speak in years and DV01s, not in bond names. And the curve is the trade: steepeners, flatteners and butterflies express macro views far more precisely than "buy bonds" ever could.