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

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

the bond rises then the yield falls.

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

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