Public sector bonds and corporate bonds
Public sector bonds and corporate bonds: Government bonds: The broad category of “sovereign” debt, which is issued and typically supported by a central government, is included in the government bond sector. Examples of sovereign government bonds are Government of Canada Bonds (GoCs), U.K. Gilts, U.S. Treasuries, German Bunds, Japanese Government Bonds (JGBs), Brazilian Government Bonds, and Indian Government Bonds. The largest government bond issuers historically have been from the United States, Japan, and Europe.
Inflation-linked bonds sometimes referred to as inflation-linked sovereign bonds or, in the United States, Treasury Inflation-Protected Securities, are also issued by a number of nations (TIPS). An inflation-linked bond offers a “real,” or inflation-adjusted, return by periodically adjusting the interest and/or principal to reflect changes in the rate of inflation. In contrast, when real interest rates are rising faster than nominal interest rates, inflation-linked bonds may suffer bigger losses.
In addition to sovereign bonds, the sector of government bonds also consists of components like:
Public sector bonds and corporate bonds
Bonds issued by agencies and “quasi-government” entities: Central governments work to achieve a variety of objectives, such as promoting the growth of small enterprises or affordable housing, for instance. The federal government guarantees some agency bonds but not others. In order to support public initiatives and/or development, supranational organizations like the World Bank and the European Investment Bank also borrow money on the bond market.
Local governments, whether provinces, states, or cities, issue local government bonds to raise money for a range of projects, from bridges to schools, as well as for basic operations. In the United States, where these bonds are referred to as municipal bonds, the market for local government bonds is well established. Provincial and municipal government bonds are also issued in other established markets.
Corporate bonds: Historically, the largest sub-segment of the bond market was corporate bonds, followed by the government sector. To finance corporate expansion or new endeavors, corporations borrow money from the bond market. Particularly in Europe and many developing nations, the business sector is developing quickly.
Investment grade and speculative grade (commonly known as high yield or “junk”) bonds are the two main types of corporate bonds. Corporations that are thought to have worse credit quality and a higher chance of default than investment-grade companies issue speculative-grade bonds. Corporate bonds fall into these two broad groups and have a wide variety of ratings, which reflects the fact that issuers’ financial standing can vary greatly.
Bonds with a speculative outlook are typically issued by young businesses, those operating in highly competitive or volatile industries, or those with weak fundamentals. Although bonds with a speculative-grade credit rating have a higher risk of default, the higher yields on these bonds are meant to make up for the added risk to investors. Ratings may be decreased if the issuer’s credit quality declines or improved if fundamentals strengthen.