The bond market, a massive and often misunderstood financial system, is fundamental to global economies, influencing everything from government finances and interest rates to investment decisions and the broader economic landscape.
Mind Map
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Did you know that there's a market worth
over $1 trillion that impacts your
mortgage, your job, your investments,
and even the price of crypto? A lot of
people don't know how this market works
or even what this market is. And no,
it's not the stock market. It's not
Bitcoin. It's the bond market. And it's
the most important piece of the global
financial system. So, what is a bond?
Picture this. You're starting a
business. You've got a great business
idea, a bulletproof business plan.
You've got energy and passion, but you
don't have the money to start it. What
do you do? You borrow from somebody who
does have the money, and you make a
promise to them that not only will you
pay them back, but you'll pay them back
with a little extra on top. That extra
is called interest.
People and businesses often borrow
money. But did you know that governments
borrow money as well? When a company or
a government needs to borrow money, they
do it by issuing bonds.
That makes them the borrower or the
issuer of the bond and the investor is
the lender of the bond. Governments are
always spending money on all sorts of
things from infrastructure to military
to healthcare. But government spending
money has a secondary benefit. It
stimulates the economy by creating jobs
and making citizens and businesses more
productive because productive citizens
and businesses produce tax revenues and
most of the government's revenues come
from taxes. Look at this graph showing
the sources of the UK government's
revenue. You'll see that most of it
comes from taxes. In fact, only 11%
doesn't come from taxes. But here's the
thing. Governments tend to spend a lot
more than they collect in revenues. And
the gap between what they spend and what
they collect is called the budget
deficit. Every year the governments
spend more than they collect, they add
to the total national debt, which is the
total amount a government owes from all
its past borrowing. As of 2025, the
total UK national debt is 2.7 trillion.
The total US national debt is a whopping $36.7
$36.7 trillion.
trillion.
So where does this extra money come
from? The government borrows that money
from the public by issuing bonds. As the
government needs money, the Treasury
holds auctions, selling bonds to
investors from all over the world. These
bonds are typically bought by banks,
insurance companies, pension funds, even
foreign governments and also regular
people. Investors buy bonds because US
government bonds are considered some of
the safest investments in the world. If
the UK and particularly the US were ever
to default on its debt, meaning they
were to go bankrupt and not be able to
repay it, well, that could be the end of
civilization as we know it. So, if that
ever happened, we'd have bigger fish to
fry. Let's break down some of the terms
you might hear about bonds.
The principle means the amount being
invested or the amount being borrowed.
The coupon is the interest payment or
the percent that you're going to receive
on that bond annually.
The maturity refers to when the loan is
due or how long it is until the investor
will receive their money back. And the
yield is the return the investor gets
from the bond.
The yield is different from the coupon
because the price of the bond can change
affecting the actual return.
You see the price of the bond can change
but the coupon or the percentage of that
bond always stays the same. So therefore
the yield can fluctuate based upon the
price of the bond which is always
changing. If the price of the bond falls
then the yield rises and if the price of
So how are these bond prices decided?
The government sells bonds in treasury
auctions at a set schedule weekly or
monthly depending on the maturity of the
bond and the yield at auction will
depend on how much demand there is at
that auction for these bonds. This is
called the primary market. When new
treasury bonds are sold in the primary
market, the yield at which they're sold
becomes a benchmark. Investors in the
secondary market will then look to this
price to reassess the value of similar
bonds that already in circulation.
Investors are constantly buying and
selling bonds on the secondary market
based on what they think is going to
happen to rates. They're constantly
guessing if the rates are going to go up
or down, if the economy is going to
speed up or slow down, if inflation is
going to go up or down. These questions
will determine what yield makes sense
for them to loan the money out at. This
means that market interest rates are
really just the yield that global bond
investors are demanding at that current
time. It's all based on what they think
is going to happen in the future. Now,
if market rates go up, that means that
the cost for the government to borrow
also goes up. And it also means that the
interest the government has to pay on
its debt goes up. Remember when I told
you that the US government debt was
currently around $36.7 trillion? Well,
not only do they have to pay that back,
but they have to pay it back with
interest. And the interest payments
alone are currently around $3 billion
per day. This makes market rates very
important because it determines if their
interest payments are going up or down.
Right now, a lot of government debt is
in short-term treasury bills which are
constantly resetting because they mature
in time frames like 6 months, 12 months
or 18 months. The government is
constantly using these short-term
treasuries to fund the borrowing, a
process called rolling over the debt.
Therefore, the overall debt burden keeps
on going up and so more and more of the
GDP of the country has to be spent on
paying off the debt burden and paying
off the interest as well. So, the
government will have less money
available for things like healthcare,
infrastructure, social services, and
military defense. Unless, of course,
they keep on borrowing more to cover the
debt burden, which unfortunately is what
they're doing. in order to pay for
public services and pay off their debt
and interest at the same time, they're
taking on more and more debt, which is
compounding the problem for the future.
So, how does all this affect the stock
market? Well, as I mentioned earlier,
bonds are a very safe investment because
unless the US government defaults, it
has to pay back your bond with agreed
interest. Stocks, on the other hand, are
riskier. A stock is just a small piece
of ownership in a company. So if that
company's stock price plummets for any
reason, your stock will plummet along
with it. So if an investor has the
choice between a 5% bond, which is
guaranteed to pay them back, or the same
value stock, which is a lot riskier, it
will be wiser and safer to choose the
bond. That interest rate for government
bonds is called the risk-free rate. The
difference between the expected return
from the stock market and the interest
rate from government bonds is called the
equity risk premium or ERP.
When bond yields rise, that premium
shrinks and therefore investors start to
sell stocks which are now less
attractive than bonds.
There's a similar concept within the
bond market itself. You see, there's a
difference between government bonds and
corporate bonds. Government bonds are
bonds issued by a government. Corporate
bonds are bonds issued by a company.
Government bonds are a lot safer since
it's highly unlikely that the government
will default on its debt. Companies are
more likely, however, to default on
their debt since companies can go
bankrupt. When there's more fear in the
market, investors want higher interest
rates from the corporate bonds since the
investment feels riskier. The gap
between safe government bonds and risky
corporate bonds is called the high yield
spread. When that spread widens, it's
usually a sign that there's some trouble
in the markets.
The bond market isn't just a mirror of
the economy, it also shapes it because
as interest rates go up, it slows down
the entire economy. Let me know in the
comments below if you found this video
useful or if you have any questions
about any of this. And make sure that
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