Bond Market and Stock Market

In the bond market, investors buy and sell debt securities (mostly bonds) released by corporations and governments. Buying a bond is like lending money and getting paid by the interest which provides a steady income source to the investors. Therefore, bonds are considered a less risky source of income especially for investors near their retirement age. Bonds are usually traded over the counter (OTC) and mostly institutional investors such as investment banks, hedge funds, and asset management firms invest in them.

On the other hand, in the stock market, stocks, options, and futures are traded. Buying the stock of a company is like getting small ownership of the company. The stock market investors are hoping to profit from an increase in stock prices. Furthermore, some companies give dividends that are paid monthly, quarterly, or yearly.

The level and type of risk involved in the stock market are different from the bond market. For the stock market, there are risks such as currency risk, interest rate risks, geopolitical risks, and liquidity risks (debt level). On the other hand, for the bond market, inflation and interest rates are the risk monitors.

Bonds and stocks are competing for the investor money. When stock prices increase, bond prices decrease and vice versa. Stocks perform better during economic growth when companies have higher earning rates. During the economy slow down, corporate's profit decline and stock prices follow it. That is a time when investors prefer investment in bonds. When the government buys more bonds, bond prices climb. This decreases the bond interest rate (bond/treasury yield). The yield curve (bond interest rate over time) can be used as an indicator of an investor's interest in bonds. That is why investors should constantly monitor yield curve changes. When interest in bonds increases (due to higher yields), investors prefer to exit their money from the stock market and invest in the bond market.

In conclusion, the overall performance of the stock market and the bond market depends on macroeconomic factors. (How the economy is doing on a big scale?) Investors should constantly monitor these macro factors as well as government involvement in the regulation of the economy. A few examples of these regulations are monetary policy, fiscal policy, and quantitative easing (QE). In the end, investors should monitor economic cycles and market cycles. The economy can be in the growth phase or downturn phase. The market cycle can be a bear market or a bull market.

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