Primary and secondary bond markets vs equity markets

How are new bonds sold?

In the primary bond markets an issuer sells new bonds to raise money. In the secondary bond markets investors trade existing bonds with each other. A sale can be a public offering , open to anyone, or a private placement .

Primary-market salethe issuer raises new money

• Public offering Use it any member of the public may buy
  • Underwritten Memorize banks guarantee the sale at a negotiated price
  • Best-efforts Memorize bank sells on commission, no guarantee
• Private placement Use it unregistered, sold to a few investors; small or customized deals
• Auction Know the idea how sovereigns usually sell

A debut issuer is the bond equivalent of an initial public offering (IPO): the first chance for investors to buy that issuer’s bonds. Unlike an IPO, which moves ownership from private to public, a debut issuer usually swaps private debt, such as a bank loan, for public bonds. Examples: a new company formed by a merger, a company whose cash flows have become steadier with age, or a sovereign selling its first foreign-currency bond. Underwriters run roadshows over several weeks to introduce the issuer.

A repeat issuer has a much shorter process. A company that returns to the equity market sells more of the same share. A bond issuer usually creates a new security priced at or near par. Less often it increases an existing bond, which is a reopening , at a price that may be far from par.

Underwritten, best-efforts and private

In an underwritten offering , banks guarantee the sale at a negotiated price. Frequent investment-grade issuers use a shelf registration , one broad offering document kept up to date that covers future issues, so they can move when markets are favorable. A deal can run in a single day: announce, hold an investor call, publish price guidance, close the order book, launch with final terms, allocate, price against the government benchmark, and trade the same or next day.

In a best-efforts offering , the bank only sells on commission, and only if it finds buyers at the agreed price. This suits weaker credits and secured deals, which take longer because investors must study collateral and unusual covenants.

A private placement is an unregistered sale to a small group. It suits small, customized deals or less well-known issuers. Sovereigns sell mostly by public auction.

How do bonds trade afterwards?

Bond trading is mostly quote-driven and over-the-counter . Dealers quote a bid (the price at which they buy) and an offer (the price at which they sell), increasingly on electronic platforms. Equities trade mainly on exchanges.

The bid–offer spread is the main liquidity gauge, often quoted in basis points.

$$S = \frac{P_{offer} - P_{bid}}{(P_{offer} + P_{bid})/2} \times 10{,}000$$

Secondary-market liquiditya tighter bid–offer spread means more liquid

• On-the-run developed-market government bonds Memorize a fraction of a basis point
• Recent bonds of frequent, high-quality corporate issuers Use it a few basis points
• Seasoned or infrequent issuers Use it 10–20 bps or more, often no trades
• Exception: distressed debt Use it a credit collapse can make a seasoned bond trade actively, well below par

The most liquid are on-the-run developed-market government bonds, the most recently issued. Primary dealers make markets in large size, with spreads of a fraction of a basis point. Some markets list government bonds on an exchange. Recently issued bonds of frequent, high-quality corporate issuers come next, with spreads of a few basis points because dealers hold inventory. Seasoned bonds of frequent issuers, and bonds of infrequent issuers, rarely trade; dealers quote 10–20 bps or more.

Many bonds do not trade at all on a regular basis. Their quoted prices are estimates built from more liquid bonds of similar credit quality and maturity (matrix pricing, covered in a later module).

Distressed debt belongs to issuers close to bankruptcy. It can trade more often than seasoned bonds, at prices well below par. Holders limited to high ratings may be forced to sell, and hedge funds seeking equity-like returns buy. It trades until the issuer liquidates or the bonds are restructured. By then the shares have usually been delisted from the exchange for failing its requirements.

How do bond and equity markets compare?

	Bonds	Equities
New issue by a repeat issuer	New security near par (or a reopening)	More of the same share
Time to issue (frequent issuer)	Hours	Days, with more process
Secondary venue	Mostly OTC dealers	Mostly exchanges
Number of securities per issuer	Many	One or two
Trading frequency	Many bonds rarely trade	Listed shares trade continuously
In distress	Trades until restructured or liquidated	May be delisted

Go deeper Why shelf registration speeds up repeat issuance

A shelf registration lets an issuer file one broad, regularly updated offering document that covers a range of future bond issues. When conditions look good it can launch a deal within hours, with no new registration. That is why the investment-grade timeline fits in a single trading day.

Go deeper Why reopenings are less common for corporates

A reopening adds to an existing bond, so the new bonds carry the old coupon and maturity, and their price may be far from par. Corporate issuers usually prefer to create a new bond at current market terms, priced close to par. Governments reopen existing issues more often, to build up large, liquid benchmark bonds.

Go deeper Electronic trading platforms

Platforms such as MarketAxess and Tradeweb let investors request or see dealer quotes online, and some allow investors to trade with each other. Most trading is still quote-driven, so it remains over the counter.