The Bond Market Is Flipping Out. Here’s Why You Should Care.

SPEAKER_1 (0:00)

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Rachel Abrams (0:17)

From The New York Times, I'm Rachel Abrams, and this is The Daily. For months now, you might have been following the headlines about the turbulence in the bond market. And by following, I mean, you might have found yourself a little confused and maybe even kind of alarmed by all this talk of the dangers to our economy. Well, today, we are going to try to demystify the headlines for those of you who might need a little bit of help. Our artillery, Ben Casselman, chief economics correspondent for The New York Times, he is going to explain what's been happening and why it matters.

It's Tuesday, September 15th. Okay, Ben, we have invited you on The Daily today to do the impossible, which is we are going to explain to people who may not understand how bonds work, what a bond is, and why the bond markets have been going haywire. And we are going to explain that not only so that you, dear listener, understand, but that you even enjoy this conversation.

Ben Casselman (1:25)

Rachel, I love a challenge. But I confess that pretty much all day I was sitting here waiting for a message from you or somebody on the team being like, you know what?

Rachel Abrams (1:34)

We can't do it. Never mind. Too hard. Nope, we're going through with it. We are taping this episode. And my first question to you, Ben, is why should people care about the bond market?

Ben Casselman (1:44)

The bond market, we talk about it less than the stock market, in part because it's confusing and I'm going to do my best as we talk here to make it less confusing.

SPEAKER_4 (1:52)

I'm sure you'll agree.

Ben Casselman (1:53)

But in many ways, it is more important than the stock market. It's arguably the most important market on earth. And your financial life is tied to the bond market, whether or not you know it.

For one thing, because you've probably got some bonds somewhere in your retirement portfolio. If you've got a 401k, if you've got an IRA, chances are there are some bonds in there. So it matters there.

Rachel Abrams (2:21)

Even if you don't even realize it?

Ben Casselman (2:23)

Even if you don't even realize it, even if you never made a decision to go invest in bonds, it's probably in your portfolio somewhere. If you've got a pension, your pension is probably invested in bonds. But also because bond yields, and we'll talk about what that means in a second, I promise, basically decide how much it costs to borrow money everywhere else in the financial system. So if you are planning on buying a house and you want to get a mortgage, that interest rate is going to be determined by the bond market. If you want to buy a car, borrow money for student loans, any of these things, open a new business, all of that is going to be based on what happens in this opaque, hard to understand bond market that we talk about.

Rachel Abrams (3:08)

You are going to make that less opaque for us. But before we do, I'm sure a lot of our listeners know what a bond is. But for people that need a refresher, can you just explain to us, not necessarily in the style of Schoolhouse Rock, unless you prefer to sing it, what is a bond?

Ben Casselman (3:21)

A bond is, no, I'm not going to sing.

A bond is just an IOU. When an entity, a national government, a state government or a city, a company wants to borrow money, they sell bonds to investors. Investors could mean individuals like you and me. It could mean pension funds, hedge funds, other governments.

And when you buy a bond, you are giving some money, call it $1,000, to the seller of that bond. You are lending them that money, and they are promising to give it back to you in some period of time, in a few months, a few years, 10 years, 20 years, 30 years. So I go and I buy a 10-year bond for $1,000. The seller of that bond is promising to give me back my $1,000 in 10 years. But I'm not just gonna give them my money and walk away, right? And so they're going to pay me interest. We're gonna agree at the time that the bond is sold to a fixed rate of interest, and they're gonna pay me interest every year until that bond matures and they give me back my $1,000. That interest rate functionally is what we call a yield. The yield on a bond is the sort of technical term that we use.