How bonds make — and break — nations

SPEAKER_1 (0:01)

The systemic risk in the economy is affected both by levels of consumer debt and federal debt. They don't necessarily interact directly, but high levels of debt across the economy can create risks for stress in the financial system, perhaps ultimately instability in the financial system.

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To hear more about potential impacts of our increasing federal debt level, subscribe to P-Gym's The Outthinking Investor in your favorite podcast app.

Ethan Wu (0:29)

Thank you.

Pushkin.

Shadow banking sounds pretty scary. This is the non-bank part of the financial system, which we've talked about before the show. Private credit is one big growing part of shadow banking, but it's not the only part, and it's certainly not the biggest part. Much larger is the bond market, over $100 trillion worldwide, and the bond market is playing an increasingly important role in financial crises. Bonds really can make or break a country. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu, here in the New York studio, joined today by FT Alphaville editor Robin Wigglesworth, who has written just a tome of a magazine piece, 20 million thousand words on bonds, their history and why they should terrify us. Robin, is this the longest piece you've ever written and that I've ever read?

Robin Wigglesworth (1:31)

I hope not. It's definitely the longest piece I've ever written, but it's probably the longest piece I've written just on the bond market, which not everybody loves as much as I do, but I think they should, which is why I wrote this.

Ethan Wu (1:42)

Katie Martin and I, on some of these Tuesday episodes, we've talked about how bonds are hot again and how they're the new trade.

And I think it's difficult to understand bonds as a threat to the financial system because they're seen as stable, right? They're seen as a place you put your money, you collect a sensible yield, you hold it to maturity, maybe you sell it or whatever, but it's not like a stock that it's gonna be down 50% and then, oh, you're broke. So what does that miss, Robin? What is it about bonds that makes them go in the same conversation as a financial crisis?

Robin Wigglesworth (2:14)

First of all, it's just a bigger market, but like stocks can't make or break the fate of a country. The bond market can and frequently has through centuries.

And more recently, actually bonds are bigger than banks. I think banks, so basically for the past thousand years, banks have kind of been the engine of capitalism. That's where credit is extended, credit's kind of fuel for the modern economy. But over the past, let's say decade or so, bond markets actually extend more credit, make more loans, are more important than banks. And I think that's like this huge kind of change to the entire financial ecosystem that we don't really have our arms around completely yet.

Ethan Wu (2:51)

Yes, no, this is such an important point. And I just wanna highlight and reinforce that.

Our mental model are in a very broad sense of people that have some awareness of finance is 2008, right? We had banks are holding all this crap and the banks are going down and they're getting billed out and JP Morgan's talking to the treasury and all this stuff. It's about banks.

And I think people assume because banking crises have been an important part of financial history and because we have such a massive banking crisis so recently in modern memory, that's how all financial crises originate. But that is perhaps decreasingly the case because of the move that you highlight in your piece, Robin, of risk from the banking system to the bond market. And we'll get into this a little bit in more detail, but I want to take us back, Robin, as you do so nicely in your magazine piece all the way back to the 12th century to the birth of bonds. You can't talk about bonds without talking about war.

Robin Wigglesworth (3:46)

Yeah, that's right. The first bond was born out of a war and it was kind of accidental. Venice went to war against Constantinople, didn't have money to pay for it. So the Doge, the ruler of Venice, issued a loan to all its citizens. They all had to lend him money at 5% a year, but they could trade that loan. They could trade their pieces of it if they needed to raise cash. And unfortunately Venice got its ass handed to it by Constantinople.

So they lost the war. They weren't able to repay the loan. So it became permanent and that became the first ever bond, the Prestiti.