Blockchain in Fixed Income Markets (Part 1)
Hi All,
Over the next few posts, I will describe how the current fixed income (bonds) markets operate among top tier banks. We'll cover the current processes including technological, legal and financial. We'll then propose how blockchain technology will be capable of replacing the legacy systems and what outcomes will result.
The Fixed Income Market Overview
The fixed income market in the United States is twice as large as the equity market by market cap and traded $829.3 Billion per day in March 2018. Most people are not familiar with the bond markets because unlike the equity market, the fixed incomes markets already operate in a decentralized manner known as "Over the Counter". The major participants of "Over the counter" markets are banks, pension funds, hedge funds, mutual funds, Corporations and Govt entities.
Types of Bonds
Let's go over the main types of bonds traded in the U.S. Bond market. It is very simple to google any one of the categories to learn more about the details on these bonds such as pricing or who issues them.
Treasury Bonds
By far the largest component, the Treasury bond market is composed of debt issued by the US Govt. The debt is issued in many different time duration (tenors) and is considered a "risk free" investment.
Municipal Bonds
Similar to government bonds, except the bonds are issued by a smaller municipality such as a State or City. The bonds are used to fund infrastructure projects, state level entitlements or maintenance projects. The bonds are slightly riskier than US treasuries but often have attractive tax advantages for an investor.
Corporate Debt
Bonds issued by corporations such as Apple, IBM, Netflix, US Steel, Merck etc. These bonds are used primarily to fund new company initiatives and considered riskier than government bonds.
Federal Agency Securities
Bonds issued by Federal organizations such as Fannie Mae, Freddie Mac. The bond may or may not be guaranteed by the federal government.
Other
There are several other bond types such as Mortgage backed securities, floating rate notes, and international bonds. These will be covered in greater detail on another post.
Check back and Follow me for the next post where we will talk about the current mechanics of how banks track bond ownership.
Good overview of bonds. One slight correction, Fannie and Freddie are not government organizations. They are government sponsored but are, in fact, publicly traded. Here are their stock prices:
That is correct and good point. I am trying to start with overviews and not dive into too many nit picky details or distinctions yet. My overall objective is to immerse knowledgeable crypto currency enthusiasts with the realities of Wall street trading mechanics. I see too many posts on how blockchain will overtake the world when there is clearly a disconnect on how (un)receptive entrenched protocols and institutions will be to change. For example, while Ripple is the leading contender for industrial Wall Street use at the moment, the players want to privatize this to keep control. Many do not understand the WHY on topics like this.
Preach! I think it is a very good idea to try to educated people in this space about traditional institutions. I see many people hating on institutions like Fannie and the Fed and they have no clear understand of their function. Good luck with that!
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STOPYou wrote your post in a clear and easy to understand way.
Well done and I am looking forward to the next one.
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