Debt Secondary Market

Debt secondary market summary: 

• The debt secondary market is not about getting out of debt, it’s an investing strategy that uses debt.

• Companies or governments that want to borrow money issue bonds that are sold to investors. 

• Investors trade bonds from federal, state, or local governments, corporations, or that are backed by mortgages and other household debts on the secondary market.

Debt Secondary Market Definition and Meaning

The debt secondary market is where investors buy and sell various types of debt, such as government bonds, corporate bonds, and mortgage-backed securities. 

If you have credit card debt or other types of consumer household debt, your monthly bills are not directly affected by the debt secondary market. But there are a few ways that the debt secondary market could affect your debts. 

Debt Secondary Market: a Comprehensive Breakdown

The debt secondary market is similar to the stock market: it’s a global market for financial assets. A debt is an asset (something valuable) for whoever owns it and is expecting to get repaid.

When governments or companies need to borrow money, they issue bonds and agree to pay a certain rate of interest to their bond investors. People who are investing for retirement can buy bonds and earn money on that investment. Instead of being a debtor, when you own bonds, you are the creditor for companies or governments. 

The main types of debt sold on the debt secondary market include: 

• Government bonds. The U.S. Treasury issues short-term and long-term debt, with various interest rates based on changing market conditions.  

• Corporate bonds. Corporate bonds tend to be more risky than U.S. government bonds, but they can also pay higher interest. 

• Municipal bonds. Cities, states, and counties can issue municipal bonds to help pay for infrastructure, schools, and other public sector spending. 

• Asset-backed securities (ABSs). This type of bond is made up of thousands of everyday people’s debts, such as home mortgages, auto loans, or credit card balances. Banks can package consumer debts into bonds and sell those bonds to investors. Then, the bank has money to issue more loans, and investors benefit from a steady stream of income as people make their loan payments each month. 

Bonds are issued for the first time on the primary market, such as a U.S. Treasury debt auction. When people buy bonds directly from the government on TreasuryDirect, a website operated by the Department of the Treasury, they are buying on the primary market. 

Once those bonds are issued and the debt is out in the world, investors can sell or buy the bonds at current market prices on the debt secondary market.