The secondary bond market is a place where an investor can freely buy and/or sell their bonds without the intervention of the original issuer. In other words, a bond twice removed from their creator is known as a secondary bond. The objective of the secondary bond market is to provide liquidity to investors. Major players here include investors, broker-dealers, and financial intermediaries such as banks, non-bank financial institutions, advisory service providers and regulators.
Secondary markets are a good indicator of a country’s economic health. while in the primary or 'new issue' market, price of a security is set beforehand and does not fluctuate, in the secondary market the price is dynamic as supply and demand are determining forces behind it. Moreover, buyers and sellers trade their bonds dictating the yields of different bonds which in turn sets the price of credit in the economy. A rise or drop in the market price signals growth or an economy hitting recession, respectively.
Features that set the secondary market apart
What are the types of secondary markets?
What do you stand to gain from the secondary market? Secondary markets offer investors the potential to make good money instantly or over a very short period. the demand for securities and, as a result, their price in secondary markets helps in evaluating a company effectively. Also, it provides investors ease of selling and buying and ensures liquidity.
However, secondary markets are volatile in nature with major price fluctuations. This can lead to a sudden jump or a dip in the bond’s price. Trading in secondary markets can very often be tedious due to investor formalities. Moreover, recurring fees such as brokerage and commission may dissuade an investor from engaging in serial trading.
Investors vie towards trading in secondary bond markets because of their: Potential for providing higher yield
Ability to maximize returns by allowing purchase before a credit upgrade
Facility of an exit strategy before issuers default
Ability to re-allocate capital to other sectors depending on where the economy is headed
Provision of changing the duration of your bond portfolio to gain increased or decreased sensitivity to interest rates
Know more articles about Bond Literacy Series to diversify your investment portfolio. Discuss with us if you have an interest in investment-grade or high-yield bond. You can learn more by discussing with the DBS Treasures team of experts. Note there may be limited options in the secondary market and brokers may not be able to buy bond directly. Download now digibank by DBS Application to enjoy easy bond transactions in IDR or USD, available 24/7.
