Covered Bonds
February 12, 2025
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Fixed income securities used to be a relatively obscure part of the financial markets. Up until the late 1970s, bond markets were used by wealthy individuals, corporations, and even governments to park large sums of money in low-risk-low return securities. Since these bonds were mostly issued by sovereign authorities, they were considered to be one of the safest forms of investment. Also, since the world was on the gold standard, bond markets were generally not impacted by currency fluctuations and inflation concerns.
However, a lot has changed in the forthcoming decades. It is important to realize that the world has gone off the gold standard which means that the government can print as much money as it wants without having anything to back up the currency. This can lead to varying rates of inflation depending upon government policies. Since inflation eats into the value provided by fixed-income securities, varying rates of inflation also mean varying rates of return for fixed-income investors. Hence, going off the gold standard converted the dull fixed income market into a thriving market where speculators can make fortunes.
Today, fixed income markets are considered to be the most powerful market in the world. The volume of trading in the bond market is so huge that stock market volumes seem pale in comparison. Hence, it is important for every investor to have a good understanding of how fixed income securities work.
Fixed income securities can theoretically be of two types. They can either be bonds which are defined as debt which the company owes to outsiders. Or, it could be preferential shares that the company owes to its own investors. Preferential shares are equity shares and hence do not represent the claim of outsiders. For the most part, the term fixed income securities is commonly used to refer to bonds.
The global bond market is massive in size. The total amount of debt securities outstanding in the bond market total to approximately $119 trillion! Since the United States has one of the most well-developed systems of debt, it accounts for close to 40% of all the outstanding debt!
The fact that fixed income securities dwarf the equity markets can be gauged from statistics. In 2020, about $12.2 trillion worth of new fixed income securities were issued in the United States. However, during the same period only $390 billion worth of equity securities were issued in the stock markets.
As mentioned above, the fixed-income securities markets have gone through a lot of changes in recent years. Some of these changes have been mentioned below:
The bottom line is that fixed income securities are a huge part of the financial system. It would not be incorrect to say that they are the most prominent financial market in the world. Changes in this market have a huge impact on governments, corporations as well as individuals worldwide.
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