It is a market place where money is borrowed and lent majorly in the form of bonds and debts. When debts are issued to companies looking to raise funds, then the market is known as a primary market, whereas when the securities are traded in the market, then that market is coined secondary market. Trades occur generally in the form of bonds, but notes and bills are also commonly found in the credit market. The participants in the credit market are banks, government, corporate companies, traders, institutional investors, and individuals.
The credit markets play a very crucial role in sustaining the growth of almost all the countries. Their main function is to provide intermediation of funds between the savers and investors and thus improve the efficiency of allocation of resources. They also play an important part in the monetary transmission mechanism. Looking at the interest rates and the investor demand for the type of bonds (risk free: e.g. - government bonds, highly risky: e.g. – junk bonds) in the credit market, one can assess the financial health of the financial community one is dealing in.
Credit markets can be segregated into five types of markets:
a. Corporate Bonds
b. Government Bonds
c. Municipal Bonds
d. Mortgage backed
Out of these, government bonds are the least risky as the treasury bills are served by the government itself and thus the chance of default is very low.
Currently, the US has the highest market share (44%) of the credit market. Since the subprime mortgage crisis in US in 2008, the liquidity in the US credit market has gone down by 70% , and it continues to worsen. The European credit market is no longer functioning efficiently after the Euro zone sovereign debt crisis (2009-2012) . All these factors have created a negative sentiment in the credit markets worldwide.