The bond market is a marketplace where credit or debt securities are issued and traded. It is also known by the terms fixed-income market, debt, market, and credit market. Its rich history has been rooted way back in the primitive era and Mesopotamian ages, wherein traders legally bound the trading using security bonds.
Through the years, the advancement of the bond market benefited different departments of the government, as well as the small and big companies in the world.
Read on and learn the bond market history throughout time.
Security Bonds during the Ancient Time
The first evidence of ancient bonds is dated 2400 BC. A stone tablet was discovered in Nippur, Mesopotamia, or Iraq today, and it is considered the first evidence of a legal and binding surety bond. The tablet states that this was a surety bond that guaranteed payment of grain if the debtor failed to pay the principal amount. The said tablet is preserved and kept up to this age at the Pennsylvania Museum of Archaeology.
Prestiti for War Funding in 1100
Prestiti became a part of the oldest bond markets in Europe. In Venice, it was used for war funding, and those affluent Venetians who invested in this bond received a 5% interest per annum. The book, A History of Interest Rates by Sydney Homer discusses the evolution of bond markets in Venice.
Luoghi or Loca in 1214
Luoghi or Loca was the oldest form of the bond market in Genoa since 1214. It was issued in the form of public debt wherein shares were divided into 100 lire. Luoghi resembled the current government bond in Genoa.
There was a worldwide ban on the trade of government debt during the post-war era, including Venetian’s Lombard banking. The Black Death plague also depleted the bond market in the European economy during the 14th Century.
First Government Bond in 1693
Even before the Bank of England existed, King William III raised funds to finance the war against France’s King Louis IV in 1693. The borrowed money from investors in London and other parts of the world became England’s first official government bond.
US Loan Certificates for Revolutionary War Funding in 1775
The US government began its own bond markets after the parliament of England used its government bonds. The US Treasury used loan certificates to fund the finances needed for the Revolutionary War in 1775. Private individuals also invested more than $27 million in the funding.
US War Bonds in 1812
A fund to finance the War of 1812 was raised in the US and called the “war bond.” The government resorted to credits and debts when federal taxation was put on hold due to the recession. It was in June 1812 when the US Congress officially authorized the country’s first Treasury Note intended for the War of 1812 funds.
However, the Treasury bonds dampened, so the US Congress authorized President James Madison in 1814 for a $34 million debt.
Municipal Bonds in 1812-1842
Municipal Bonds were raised as capital for infrastructure projects of the state. These bonds were used to finance the funds needed for roads and bridges, as well as health centers, hospitals, and schools.
In New York City, an obligation bond to fund the Erie Canal project was issued. Within four decades, there were around 42 kinds of issued bonds used to finance the canal project. By 1843, the states of America had a total debt of $25 million.
In the 1860s, significant local debts were issued to fund the railroad expansion after the American Civil War. Unfortunately, due to the panic in 1873, local governments and states halted the issuance of all municipal bonds. Thus, infrastructure projects stopped.
Austro-Hungarian Loan in 1914
When World War II began, almost all countries implemented their own policy on war funding. In 1914, the Austria-Hungary government issued Austrian bonds at a semi-annual prearranged plan, paying 5% interest to big loans and 100 Kronen for the smallest bonds.
Eventually, Austria separated from Hungary, and so they issued loans individually. Austrian bond had a subscription amounting to $440 million, while the Hungarian bond issued amounted to $235 million.
Liberty Bonds in 1917
The Liberty Bond in 1917 under the First Liberty Bond Act was launched to fund the war against Germany. The Liberty Loan program created these bonds as a result of the Federal Reserve System and US Treasury joint venture.
Because of the program, many Americans agreed to raise money to help the government in military operations. After the war, the government returned the money to them at a rate as promised. They were encouraged to invest in Liberty Bonds in support of the military and as a sign of patriotism to the country for a 3.5% coupon rate. However, the Treasury Department became disappointed because the Americans refused the offer.
The federal government appealed to the citizens again, offering bond investments at a 4.25% rate.
UK Bonds in 1917
At a 5% coupon rate, the British government raised more capital by issuing UK bonds as national war bonds in 1917. The government encouraged private investors to invest in Exchequer Bonds to help the country fight and win the war.
Victory Bonds in 1917
Canadian war bonds were issued in November 1915 and were known as Victory Bonds in 1917. It was first offered at a rate of 5.5% in a smaller denomination of $50. Soon after the offer, more Canadians took advantage of the low price. Thus, the First Victory Bond was oversubscribed at more than $398 million. The Second and Third Victory Loans were issued in 1918 and 1919, respectively. It raised another $1.34 billion for Canada. However, not everyone can afford to invest in Victory Bonds. To raise the needed funds, the government issued war savings certificates instead.
First Treasury Bills in the 1920s
Treasury debt sales were restricted in the 1920s due to flaws in price offerings. To address the issue, President Herbert Hoover incorporated the new T-bills in 1929. However, they were auctioned upon demand instead of selling the new T-bills.
US Savings Bond in 1935
President Franklin D. Roosevelt launched the US Savings Bond on February 1, 1935. The purchase price of this bond was only $18.75 with a face value of $25, thus the nickname “baby bond.”
Series E Defense Savings Bond in 1941
The Series E Defense Savings Bond is also known by the term Defense BoH Bonds. It was announced by President Franklin D. Roosevelt in 1941. The president availed one for himself a day after it was made public.
Moreover, Defense Bonds became War Savings Bonds or War Bonds after the attack at Pearl Harbor.
The Eisenhower Recession in 1955-1959
The recession created a great impact across the United States and Europe. It was the worst recession after World War II from 1940 to 1970, and it resulted in an economic loss.
Eurobond in 1963
An Italian railroad operator, Autostrade, was the one that introduced the Eurobond in 1963. Unlike other debt instruments, the Eurobond was denominated in a different currency. Because of this, Eurobond was named an external bond.
Loss of Long-term Bonds during the Vietnam War in 1969
The war in Vietnam in 1969 caused the US to have a massive inflation hike, so long-term bonds lost their value. The US funded the war using taxes and other monetary policies, leading to inflation.
Junk Bonds in 1970-1980
Junk bonds were those high-yielding bonds issued to boost the appeal for LBOs or leveraged buyouts. They were introduced in 1970-1980 when fallen-angel companies saw a drop in investment-grade bonds. Because of its appealing yields, more investors preferred junk bonds to finance their projects. In 1989, the junk bond market had a surged value of $189 billion.
The Great Bond Massacre in 1994
The Federal Reserve decided to hike the interest rates of short-term bonds in 1994 to deal with the issue of a stagnant bond market. The rate was too low at 3% for six years straight, and after the hike, it was raised to 3.25% in March and 3.37% in April. From May to August, the rate was raised to 4.75%. By the end of 1994, the rate of Federal Funds reached 5.5% to a high rate of 8%, causing a global panic. It was estimated that the loss in the bond market almost hit $1.5 trillion.
Collateralized Debt Obligations in 2002
Collateralized Debt Obligations or CDOs are not bonds but securities collateralized or backed up by assets. The earliest forms of CDOs were introduced by Drexel Burnham Lambert in 1987 but only became significant in 2002. However, the policy also became riskier and more complex.
Conclusion
Through the years, the bond market has played a major role in the financial markets. It served as a barometer of economic growth and has been traded and marketed far longer than stocks.
Corporate bonds, considered investment-grade or high-yield bonds, are maximized for long-term debts. Government bonds are those issued by the national government, while municipal bonds or “muni bonds” are issued by the local government for local municipality projects. Mortgage-backed bonds are those backed by collateral.
Although bond markets tend to be less risky and most liquid in the world of financial investments, they, however, provide a lower return on investment. Also, ordinary investors may not be able to directly access the sale of bonds for their own interest.
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