One of the main advantages of investing in it is the liquidity it offers investors through assets such as stock certificates or bonds . In addition, it is characterized by being less volatile than the capital market.
It is a mechanism to which companies and governments go to obtain financing through the issuance of bonds , for example, government and private debt – bank or corporate securities – which represents an obligation for the issuer to pay with an interest rate and in a certain time.
Issuers can be the federal, state or local administration, as well as parastatal or private organizations that need financing to carry out their activities or projects . It is an alternative to applying for loans or credits.
Investors who prefer to participate in this market generally have a conservative or moderate profile and seek flexible times to access their resources and cover their obligations.
The investor’s personality, as well as his aversion to risk and investment horizon – which is nothing more than the short or long term maturity in which the person will be willing to invest – will depend on the investment strategy .
Also internationally, companies and governments of any economy go to the debt market because the liquidity of the market is an incentive for investors to participate.
In the particular case of Mexico, the investor has to contact a financial advisor or institution to buy the instruments.
Once that step is done, there are two types of paper to negotiate: the primary market, where the government or companies place their securities for the first time through financial institutions, for example, the Banco de México Cetes auction .
Then there is the secondary market . In this, the securities are bought and sold among investors at market price, which depends on supply and demand.
Types of debt market instruments
Of the three types of instruments are those of public debt , there the federal government is in charge of issuing instruments such as Cetes, Bonds, D Bonds and Udibonos, and the Bank of Mexico (Banxico) acts as financial agent in their placement.
There are also the Savings Protection Bonds (BPAS) issued by the Institute for the Protection of Bank Savings (IPAB) which, although they are issued by said institute, have a credit guarantee from the federal administration.
The Federal Treasury Certificates (Cetes) are the fixed income instrument issued by the government, whose objective is to finance public spending and regulate monetary flows.
The Federal Government Development Bonds (M Bonds) are government securities at a floating rate, this means that they pay interest and review their interest rate in various periods. On the other hand, the so-called Bondes D pay interest in pesos every month (28 days or depending on the time that replaces it in case of non-business days). Currently they are auctioned in three different maturities of 3, 5 and 7 years.
Udibonos – denominated in Investment Units – are instruments that protect their holder or issuer from inflation. These are issued and placed for 3, 10 and 30 years and pay interest every six months based on a fixed real interest rate that is determined on the issue date of the title.
And finally, the corporate ones that are issued by companies and financial institutions. These types of assets imply a greater risk than government papers, therefore, they offer higher returns. Among these are: short and long-term stock certificates.
What you should know about the debt market
Like anything in the stock market and despite being considered one of the least volatile, there are certain risks. One of them is credit risk, which refers to the possibility of default by the issuer. In government papers that risk is very low.
To determine the risk that the investor may assume the titles of debt, credit firms serve as a guide to assess the risk and the likelihood of the company, bank or government, to meet their obligations.
In this way, investors know how to choose where to invest their money , as they take into account the quality of a security with the ability of the issuer to meet its commitments to creditors. The main credit firms are: HR Ratings, Fitch Ratings, Moody’s and Standard and Poors (S&P).
With these firms, investors review the situation of companies and banking institutions through their financial statements — which they print every quarter — to determine the conditions of the issuer’s debt or bond.
The rating levels issued by each of the firms are divided by their investment grade and high yield. Ratings may vary from firm to firm, for example, ranging from ‘AAA’ to ‘D’ with different outlook, either stable or negative, which defines the potential for changes in the rating over a medium and long period.
Before you decide to invest in debt papers it is important that you know the level of risk and function of each one, therefore, allocating your time to increase your financial education is vital to access any stock exchange operation.
Do not forget that the debt market is a space that serves as an intermediary to obtain financing through the issuance of a government or corporate title.
If you want to start a portfolio with government bonds or corporate assets, you can approach Private Banking experts at Grupo Financiero Monex. They know how to make your money work for you.