What Is a Bond Market Analysis?

A bond market analysis is used by investors interested in putting capital into fixed income investments known as bonds. Bonds return regular interest payments to investors, so a study of interest rates is critical to any analysis of the market. In addition, a bond market analysis should compare the different types of bonds, such as government bonds, municipal bonds, and corporate bonds, in terms of their risks and rates of return. Investors may wish to consider an inter-market analysis, which would compare the bond market as a whole to the markets for other types of investment securities.

In times of economic turmoil, investors often look to bonds as relatively safe venues for their investment capital. Bonds are essentially loans given by investors to the different issuing institutions. As repayment for the loan, investors get the eventual return of their principal at the end of the bond term, along with regular installments of interest throughout the life of the bond. Like any other investment, it's a good idea to study the market as diligently as possible, which is why a bond market analysis is crucial for bond investors.

Interest rates play a huge role in any bond market analysis. If interest rates are low, it means that the fixed income being returned to investors will be relatively low as well. When the rates fall below the rate of inflation, it essentially means that bond investors aren't getting enough return to keep up with rising prices. For that reason, a bond analysis should be focused on projecting interest rates in the future.

Another key part of a bond market analysis is the comparison of the performance of different types of bonds. Interest rates on bonds are often determined by the risk involved with the issuing institution. For example, governments are usually stable institutions, so government bonds offer low interest rates and high security. By contrast, corporate bonds have to contain higher interest rates to compensate for the fact that the corporations are at higher risk of default. Investors should compare the credit ratings of issuers to the returns being offered to see if the risks are worth the rewards.

Finally, investors may want to round out their bond market analysis by comparing bond returns to other types of investments. The key here is for the investor to decide whether the relative safety of the bond market is worth the fact that returns may pale in comparison to riskier investment securities like stocks. Taking the bond market as a whole and putting it up against other investments can help an investor decide if bonds are the right choice.