The best feature of bonds is the one that you hear the least about, and thats where we are going to start The Learn Bonds Basics of investing in bonds course.
Successful people know that if you want to do better than the average person, then you can’t just do what everyone else does. Thats why, while the average investor stays glued to the stock market, the smart investor watches the bond market.
Why does the smart money watch the bond market?
Two words: Interest rates. Interest rates, or the price that one pays for borrowing money, and the price that one receives for lending money, are what makes the world go round.
Interest rates are so important, that by simply raising and lowering the interest rate that banks charge to lend each other money overnight, the Federal Reserve can affect the entire economy.
The rates of interest that you pay on everything from credit cards to home loans, to how much you get paid on your savings account are all based on what is happening in the bond market.
This is why by learning about investing in bonds you can understand what is happening not only to bonds, but what is likely to happen in the stock market and the rest of the economy as well.
This is also why, while the average investor watches the stock market react to changes in interest rates and economic conditions, the smart money predicts what is going to happen there by watching the bond market, where interest rates are set.
Another reason the smart money learns about investing in bonds is because it is the largest securities market in the world. According to SIFMA, the total value of all outstanding US Bonds was $36.9 Trillion at the end of the 1st quarter of 2012. Thats somewhere around twice the size of the market capitalization of all US Publicly traded companies.
However, there is not just one type of bond. Here is a breakdown of the largest parts of the market.
US Treasuries – Treasuries are debt securities issued by the US Government. Not including treasuries held by the Fed and the US Government itself, there are currently around $10 Trillion of treasuries outstanding. That makes treasuries the largest part of the bond market.
Mortgage Related Debt – Mortgage backed securities which are bonds backed by home loans, and Agency Mortgage Backed Securities which are backed by federally gauranted home loans is the second biggest part of the bond market at 8.4 Trillion. .
Corporate Bonds – Bonds issued by corporations here in the US account for around $8 Trillion.
Municipal Bonds – Next in line is the market for bonds issued by state and local governments and government entities at $3.9 Trillion.
Agency bonds – Bonds issued by government agencies not related to mortgages such as Sallie mae for student loans at $2.3 Trillion.
That’s our lesson on investing in bonds for today. Thanks for watching and feel free to leave any comments or questions in the comments section below. Stay tuned for our next lesson where we will cover more bond market basics on how bond prices move, the fed, and the yield curve.