Fixed Income

Fixed Income and Bond Markets

Fixed Income in the United States generally receives a smaller proportion of media attention relative to equity coverage. The news flow that comes from Apple and Tesla product launches subsume headlines relative to the mundane business of bond issuance - yet bond and credit markets are bigger and arguably have more direct effects on a broader demography. While U.S. equities receive more press, the overall stock market is nonetheless smaller than the U.S.bond market. Both markets are huge: the stock market having just over $37 trillion in total market cap, while the total amount of debt outstanding through bonds exceeds $45 trillion.

The Fixed Income market includes corporate and government agency debt. Both sectors raise money through issuing bonds. According to the Securities Industry and Financial Markets Association, an industry group, the total amount of debt outstanding at the end of 2019 was more than $45 trillion. That included more than $17 trillion in United States Treasury debt, more than $10 trillion in mortgage-related bonds, more than $9 trillion in corporate bonds and close to $3 billion in municipal bonds. Money market debt instrument had a smaller slice of the pie.

The stock market has been booming up to arrival of Covid19. Indices like the S&P 500 and the Dow Jones Industrial Average have soared on the back of low interest rates, (perhaps symptomatic of a Cantillon Effect precipitated by recent Fed Monetary Policy). The total capitalization of the Russell 3000 Index, which incorporates more than 98 percent of the U.S. market's capitalization is a broad representative indicator. Siblis has recently (2019) estimated that US stock market capitalization to be $37 trillion compared to China with a market Cap of $12 trillion and Japan veering towards $6 trillion. Whatever benchmark we use - the US bond market would appear to be huge even compared to US GDP of $21 trillion. Debt (Treasury) / GDP stands in excess of 100% and there appears to be no short term prospect of reducing that ratio. Fixed Income will remain relevant for both Financial and Economic analysis for years to come. In what follows, we try to present basic techniques to understand to the basic building blocks of this market. We will also present code and some app development for Bond estimation that you may find useful.