Bond Markets Defined

Municipal securities are debt obligations issued by states, cities, counties, and other governmental entities to raise money to build schools, highways, hospitals, and sewer systems, as well as many other projects for the public good. Municipal securities are the most important way that U.S. state and local governments borrow money to finance their capital investment and cash flow needs. An important distinguishing characteristic of the municipal securities market is the exemption of interest on most municipal bonds from federal income taxes. The implicit subsidy provided by the federal government permits municipal issuers to compete effectively for capital in the domestic securities market. There is currently in excess of $3.72 trillion in outstanding municipal debt.

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The U.S. Treasury securities market is the largest and most liquid market in the world. There is currently $10.92 trillion in outstanding marketable Treasury debt. The U.S. Treasury issues three types of securities: bills, which have a maturity of less than 1 year; notes, which have a maturity of between one and 10 years; and bonds, which have a maturity of greater than 10 years.

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Corporate debt securities are obligations issued by corporations for capital and operating cash flow purposes. Corporate debt is issued by a wide variety of corporations involved in the financial, industrial, and service-related industries. There is approximately $9.10 trillion in corporate debt currently outstanding.

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Mortgage securities represent an ownership interest in mortgage loans made by financial institutions (savings and loans, commercial banks, or mortgage companies) to finance the borrower’s purchase of a home or other real estate. Mortgage securities are created when these loans are packaged, or “pooled”, by issuers or servicers for sale to investors. As the underlying mortgage loans are paid off by the homeowners, the investors receive payments of interest and principal. The majority of mortgage securities are issued and/or guaranteed by an agency of the U.S. Government, the Government National Mortgage Association (Ginnie Mae), or by government-sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Some private institutions, such as subsidiaries of investment banks, financial institutions, and home builders, also package various types of mortgage loans and mortgage pools. The securities they issue are known as “private-label” mortgage securities, in contrast to “agency” mortgage securities issued and/or guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac. There is an estimated $8.17 trillion in outstanding mortgage-related securities.

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Asset-backed securities, called ABS, are bonds or notes backed by financial assets. Typically these assets consist of receivables other than mortgage loans, such as credit card receivables, auto loans, manufactured-housing contracts and home-equity loans. There is approximately $1.70 trillion in debt currently outstanding.

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Equities, also known as stocks or equity shares are securities that represent a fractional ownership interest in a business, possibly including the right to vote on management issues. Whatever the purpose — saving for a new home, planning for your children’s college education, ensuring retirement income or other financial goals — investing in equities can help you achieve your objectives and play an important role in a diversified portfolio. Equities can be broken down into stock classes. Public corporations typically offer two types of shares: common stock and preferred stock. A company seeking to raise funds to grow and create liquidity for shareholders can choose to become a publicly traded company by issuing shares to the public via an Initial Public Offering (IPO).

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