Fixed Income

Types of Bond Markets

Even though there is no standard classification of bond market, we can broadly classify bonds from the perspective of a country as follows:

  • Internal Bond Market: This is the national bond market of a country. The internal bond market itself has two subcategories:
    • Domestic Bond Market: This refers to the market where the issuers domiciled within the country issue the bonds and where these bonds are traded. For example, in the US, a bond issued by Federal Reserve will be a part of the domestic bond market. A domestic bond is an obligation of a domestic issuer, denominated in domestic currency, and sold and traded in the domestic market.
-   **Foreign Bond Market:** This is the market where the issuers from outside the country issue the bonds in the country. For example, Japanese Government issuing a US-dollar denominated bond in the US foreign bond market. Another example is Ford Motor Corporation issuing a yen denominated bond in Japan. Foreign bonds in the US are called Yankee bonds, and foreign bonds in UK are called Bulldog bonds. They are called Samurai bonds in Japanese market, and Panda bonds in China. Note that foreign bonds are similar to domestic bonds except that the issuer is a foreign entity.
-   **Eurobond Market:** This is also referred to as the external bond market or the international bond market. This is the market for long-term debt instruments issued and traded in the offshore market. A distinguishing characteristic for Eurobonds is that a Eurobond is offered for sale simultaneously in a number of countries. Eurobonds are bonds issued by a non-resident and denominated in other than the currency of the country in which it is being placed. The bond’s currency of denomination is referred to as an offshore currency. An example is a US-based company issuing a U.S. dollar denominated bond in Europe.

Eurobonds are named based on the currency in which they are issues. For example, Eurobonds issued in US dollar are called Eurodollar bonds. Similarly a Eurobond in Japanese yen will be called Euroyen bonds.

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