0:02 Did you know that there's a market worth
0:04 over $1 trillion that impacts your
0:07 mortgage, your job, your investments,
0:10 and even the price of crypto? A lot of
0:12 people don't know how this market works
0:15 or even what this market is. And no,
0:17 it's not the stock market. It's not
0:20 Bitcoin. It's the bond market. And it's
0:22 the most important piece of the global
0:27 financial system. So, what is a bond?
0:29 Picture this. You're starting a
0:31 business. You've got a great business
0:34 idea, a bulletproof business plan.
0:37 You've got energy and passion, but you
0:39 don't have the money to start it. What
0:42 do you do? You borrow from somebody who
0:44 does have the money, and you make a
0:46 promise to them that not only will you
0:48 pay them back, but you'll pay them back
0:50 with a little extra on top. That extra
0:53 is called interest.
0:54 People and businesses often borrow
0:57 money. But did you know that governments
0:59 borrow money as well? When a company or
1:01 a government needs to borrow money, they
1:04 do it by issuing bonds.
1:06 That makes them the borrower or the
1:09 issuer of the bond and the investor is
1:11 the lender of the bond. Governments are
1:13 always spending money on all sorts of
1:16 things from infrastructure to military
1:18 to healthcare. But government spending
1:21 money has a secondary benefit. It
1:23 stimulates the economy by creating jobs
1:26 and making citizens and businesses more
1:28 productive because productive citizens
1:31 and businesses produce tax revenues and
1:33 most of the government's revenues come
1:36 from taxes. Look at this graph showing
1:37 the sources of the UK government's
1:39 revenue. You'll see that most of it
1:43 comes from taxes. In fact, only 11%
1:46 doesn't come from taxes. But here's the
1:48 thing. Governments tend to spend a lot
1:50 more than they collect in revenues. And
1:52 the gap between what they spend and what
1:53 they collect is called the budget
1:56 deficit. Every year the governments
1:58 spend more than they collect, they add
2:01 to the total national debt, which is the
2:03 total amount a government owes from all
2:07 its past borrowing. As of 2025, the
2:11 total UK national debt is 2.7 trillion.
2:14 The total US national debt is a whopping $36.7
2:16 $36.7 trillion.
2:18 trillion.
2:20 So where does this extra money come
2:23 from? The government borrows that money
2:26 from the public by issuing bonds. As the
2:28 government needs money, the Treasury
2:30 holds auctions, selling bonds to
2:32 investors from all over the world. These
2:35 bonds are typically bought by banks,
2:38 insurance companies, pension funds, even
2:40 foreign governments and also regular
2:44 people. Investors buy bonds because US
2:45 government bonds are considered some of
2:48 the safest investments in the world. If
2:51 the UK and particularly the US were ever
2:54 to default on its debt, meaning they
2:56 were to go bankrupt and not be able to
2:59 repay it, well, that could be the end of
3:01 civilization as we know it. So, if that
3:04 ever happened, we'd have bigger fish to
3:06 fry. Let's break down some of the terms
3:09 you might hear about bonds.
3:12 The principle means the amount being
3:16 invested or the amount being borrowed.
3:20 The coupon is the interest payment or
3:21 the percent that you're going to receive
3:24 on that bond annually.
3:27 The maturity refers to when the loan is
3:29 due or how long it is until the investor
3:32 will receive their money back. And the
3:34 yield is the return the investor gets
3:37 from the bond.
3:39 The yield is different from the coupon
3:41 because the price of the bond can change
3:44 affecting the actual return.
3:47 You see the price of the bond can change
3:49 but the coupon or the percentage of that
3:53 bond always stays the same. So therefore
3:55 the yield can fluctuate based upon the
3:57 price of the bond which is always
4:00 changing. If the price of the bond falls
4:03 then the yield rises and if the price of
4:12 So how are these bond prices decided?
4:14 The government sells bonds in treasury
4:16 auctions at a set schedule weekly or
4:18 monthly depending on the maturity of the
4:20 bond and the yield at auction will
4:22 depend on how much demand there is at
4:25 that auction for these bonds. This is
4:28 called the primary market. When new
4:30 treasury bonds are sold in the primary
4:32 market, the yield at which they're sold
4:35 becomes a benchmark. Investors in the
4:37 secondary market will then look to this
4:40 price to reassess the value of similar
4:43 bonds that already in circulation.
4:45 Investors are constantly buying and
4:47 selling bonds on the secondary market
4:48 based on what they think is going to
4:50 happen to rates. They're constantly
4:52 guessing if the rates are going to go up
4:54 or down, if the economy is going to
4:57 speed up or slow down, if inflation is
5:00 going to go up or down. These questions
5:03 will determine what yield makes sense
5:05 for them to loan the money out at. This
5:08 means that market interest rates are
5:10 really just the yield that global bond
5:12 investors are demanding at that current
5:15 time. It's all based on what they think
5:18 is going to happen in the future. Now,
5:20 if market rates go up, that means that
5:22 the cost for the government to borrow
5:25 also goes up. And it also means that the
5:26 interest the government has to pay on
5:29 its debt goes up. Remember when I told
5:31 you that the US government debt was
5:36 currently around $36.7 trillion? Well,
5:38 not only do they have to pay that back,
5:39 but they have to pay it back with
5:42 interest. And the interest payments
5:44 alone are currently around $3 billion
5:47 per day. This makes market rates very
5:50 important because it determines if their
5:52 interest payments are going up or down.
5:54 Right now, a lot of government debt is
5:57 in short-term treasury bills which are
5:59 constantly resetting because they mature
6:02 in time frames like 6 months, 12 months
6:05 or 18 months. The government is
6:06 constantly using these short-term
6:09 treasuries to fund the borrowing, a
6:11 process called rolling over the debt.
6:14 Therefore, the overall debt burden keeps
6:17 on going up and so more and more of the
6:19 GDP of the country has to be spent on
6:21 paying off the debt burden and paying
6:23 off the interest as well. So, the
6:24 government will have less money
6:27 available for things like healthcare,
6:29 infrastructure, social services, and
6:31 military defense. Unless, of course,
6:33 they keep on borrowing more to cover the
6:36 debt burden, which unfortunately is what
6:38 they're doing. in order to pay for
6:40 public services and pay off their debt
6:42 and interest at the same time, they're
6:44 taking on more and more debt, which is
6:47 compounding the problem for the future.
6:49 So, how does all this affect the stock
6:53 market? Well, as I mentioned earlier,
6:55 bonds are a very safe investment because
6:57 unless the US government defaults, it
7:00 has to pay back your bond with agreed
7:02 interest. Stocks, on the other hand, are
7:05 riskier. A stock is just a small piece
7:07 of ownership in a company. So if that
7:09 company's stock price plummets for any
7:11 reason, your stock will plummet along
7:13 with it. So if an investor has the
7:16 choice between a 5% bond, which is
7:18 guaranteed to pay them back, or the same
7:20 value stock, which is a lot riskier, it
7:23 will be wiser and safer to choose the
7:25 bond. That interest rate for government
7:28 bonds is called the risk-free rate. The
7:30 difference between the expected return
7:32 from the stock market and the interest
7:35 rate from government bonds is called the
7:38 equity risk premium or ERP.
7:41 When bond yields rise, that premium
7:43 shrinks and therefore investors start to
7:45 sell stocks which are now less
7:47 attractive than bonds.
7:49 There's a similar concept within the
7:52 bond market itself. You see, there's a
7:54 difference between government bonds and
7:57 corporate bonds. Government bonds are
8:00 bonds issued by a government. Corporate
8:03 bonds are bonds issued by a company.
8:05 Government bonds are a lot safer since
8:06 it's highly unlikely that the government
8:09 will default on its debt. Companies are
8:11 more likely, however, to default on
8:13 their debt since companies can go
8:15 bankrupt. When there's more fear in the
8:18 market, investors want higher interest
8:20 rates from the corporate bonds since the
8:23 investment feels riskier. The gap
8:25 between safe government bonds and risky
8:27 corporate bonds is called the high yield
8:30 spread. When that spread widens, it's
8:32 usually a sign that there's some trouble
8:34 in the markets.
8:36 The bond market isn't just a mirror of
8:39 the economy, it also shapes it because
8:42 as interest rates go up, it slows down
8:44 the entire economy. Let me know in the
8:46 comments below if you found this video
8:48 useful or if you have any questions
8:51 about any of this. And make sure that
8:53 you hit that like and subscribe button
8:55 for more videos like this one. It would
8:57 really help the channel out if you did.
