A brief history of fixed income market

The most significant segment of the world bond market is the government bond market, also known as the sovereign debt market. Governments historically used to raise money for only a few outlays, such as spending on war and justice. For example, the Bank of England was founded in 1694 to finance the Royal Navy.

Government Bonds

The first known bond dates back to 2400 B.C., when a stone at Nippur in Mesopotamia, now Iraq. This bond insured grain payment by the principal, while the surety bond promised repayment if the principal failed to pay. Corn was the money at the time. The Bank of England issued the first government bond in 1693 to generate funds for a war against France. The original bonds were a mixture of a lottery and an annuity. 

The United States of America initially issued sovereign Treasury bonds to fund the American Revolutionary War. Sovereign debt ("Liberty Bonds") was issued in 1917, shortly after the United States declared war on Germany, to fund its World War I efforts. 

Sovereign debt is issued by other countries, just like the United Kingdom and the United States of America do. However, as you are aware, the value of a bond and its yield vary based on the issuing government's economy and fiscal and monetary policies.

Corporate Bonds

Non-investment grade public corporations were authorised to issue corporate debt during the late 1970s and early 1980s when bonds incurred significant losses due to two oil shocks, widespread inflation, and rising interest rates. 

Until then, only investment-grade firms could issue public bonds, but if a company's rating fell after the bond was issued, it could still trade and was referred to as a "fallen angel." 

Bear Stearns, on the other hand, underwrote the first new-issue junk bond in decades in 1977. By 1983, non-investment grade debt accounted for over one-third of all corporate debt. The junk-bond market had grown to $189 billion by 1989.

As we continue our quest to understand the fixed-income market, we will look closely at government bonds in the following topic.