Bond market segments, issuers and investors

How is the bond market divided?

Bond markets are cut along three standard dimensions: issuer type (often called the sector), credit quality and time to maturity . Currency, geography and environmental, social and governance (ESG) characteristics are sometimes added as extra cuts.

Fixed-income marketthree standard dimensions, plus optional extras

• Issuer type (sector) Use it who owes the money
  • Government sovereign, agency, local
  • Corporate industrial, financial, utility
  • Securitized asset-backed securities (ABS), mortgage-backed securities (MBS), asset-backed commercial paper
• Credit quality Memorize how likely repayment is
  • Default-risk-free developed-market sovereigns, often AAA
  • Investment grade BBB− / Baa3 and above
  • High yield BB+ / Ba1 and below
• Time to maturity Use it how long you wait
  • Short-term under 1 year
  • Intermediate-term 1 to 10 years
  • Long-term over 10 years
• Extra cuts Know the idea currency, geography, ESG

Equities are simple by comparison. A company usually has one or two share lines. The same company may have dozens of debt instruments outstanding at once, across maturities, currencies and levels of security: a bank loan, a credit facility, commercial paper, 5-year notes and a 20-year bond.

The grid below is the picture to hold in your head. Rows are credit quality, columns are time to maturity.

	Under 1 year	1 to 10 years	Over 10 years
Default-risk-free (developed-market sovereign)	Treasury bills, repos	Treasury notes	Treasury bonds
Investment grade	Commercial paper, asset-backed commercial paper	Unsecured corporate bonds, asset-backed securities (ABS)	Unsecured corporate bonds, mortgage-backed securities (MBS)
High yield	Secured bank facilities (no commercial paper)	Secured corporate bonds, leveraged loans	Secured corporate bonds

What are credit ratings and where is the investment-grade line?

A credit rating is a letter grade for an issuer’s ability to meet its debt obligations. It reflects both the probability of default and the expected loss if default happens. Credit rating agencies such as Standard & Poor’s (S&P), Moody’s and Fitch assign and maintain ratings, for short-term and long-term debt, and for issuers and for individual bond issues. Many investors may hold only rated bonds, or only a limited share of unrated ones.

S&P long-term ratingsMoody's equivalents in brackets

• Investment grade Memorize lowest rung is BBB− (Baa3)
  • AAA, AA, A Aaa, Aa, A
  • BBB, BBB− Baa2, Baa3: the last investment-grade rungs
• High yield (speculative, junk) Memorize top rung is BB+ (Ba1)
  • BB+, BB, B Ba1, Ba2, B2
  • CCC, CC, C Caa, Ca, C: deep speculative
  • D in default

The line to memorize sits between BBB− and BB+. Investment grade means BBB− (S&P, Fitch) or Baa3 (Moody’s) and above. High yield (also speculative grade, or junk) means BB+ or Ba1 and below. D means the issuer is in default.

High yield contains two kinds of issuer. One is the newer or less stable company with uneven operating cash flows, which investors usually want to lend to against collateral. The other is the fallen angels : issuers that were investment grade when the bond was issued and have since been downgraded. A bond that was high yield from day one is not a fallen angel.

Developed-market sovereigns are normally the most creditworthy borrowers in their own currency, because they can tax their economy. Investors treat their bonds as “default-risk-free”, which is the top row of the grid.

Exam tip The line is between BBB− and BB+. Count letters, not pluses: three B’s and a minus is still safe.

How do issuers fund themselves?

A strong issuer has unsecured access to the whole maturity range. A weak one is pushed toward secured loans. The matching rule is simple: short-term needs, such as seasonal working capital, are met with short-term debt; long-lived assets such as factories are financed with long-term debt.

Issuer profile (ours)	Typical funding
Large investment-grade manufacturer	commercial paper backed by a 364-day bank line, a revolving credit facility, unsecured 5- and 20-year notes
High-yield software company with few hard assets	Secured working-capital facility, floating-rate term loan, secured callable notes. No commercial paper
Developed-market sovereign	Bills, notes and bonds across the curve, held by foreign investors and central banks as reserves

Commercial paper is short-term, usually unsecured borrowing that only strong issuers can sell. A bank line stands behind it as a backstop.

Credit facilities are loan agreements with a pre-agreed limit and a balance that moves with the borrower’s needs, like a credit card. A syndicate (a group of banks) usually provides them for a fee, and the borrower pays whether or not it draws.

Sovereigns borrow across the whole curve, and their bonds are often held abroad. Central banks buy them as currency reserves and also use domestic sovereign bonds in monetary policy operations.

Who invests in each segment?

Investors sit in the grid for reasons of their own: the timing of their obligations, their need for cash and their appetite for risk.

Investor	Typical segment
Money market funds, corporate treasurers	Short-term, high quality
Pension funds, insurers	Long-term, fixed coupons to match long liabilities
Central banks	Sovereign bonds (reserves, monetary policy)
Bond funds and exchange-traded funds (ETFs), asset managers	Across the grid, by mandate
Hedge funds, distressed debt funds	High yield and distressed, seeking equity-like returns

Distressed debt is the bonds of an issuer close to bankruptcy. They trade well below par. Funds restricted to higher ratings may be forced to sell, and hedge funds are the usual buyers.

Expected return rises with credit risk. Investment-grade yields are modestly above sovereign yields. High-yield investors want a much larger premium and often compare it with equity returns. A foreign investor in emerging-market debt expects more than from a developed-market sovereign, to pay for lower credit quality and for currency risk.

Go deeper Why a developed-market sovereign is called default-risk-free, and when that fails

A government that borrows in its own currency can tax and, in the last resort, rely on its central bank, so it can almost always pay. That is why the grid calls it default-risk-free. It is a convention, not a guarantee. A government that borrows in a foreign currency cannot print it, and the label does not apply.

Go deeper Forced selling of fallen angels

Index and mandate rules often say “investment grade only”. When a bond is cut to BB+, many holders must sell at about the same time, which can push the price down more than the credit news alone justifies. Buyers with high-yield mandates may then step in.

Go deeper Unrated bonds

Not every bond has a rating. Many funds cap the share of unrated bonds they hold, because they cannot check it against a rating-based limit. An unrated bond is not necessarily weak. It simply has no agency opinion.