The Hater's Guide To Bonds With Rob Wigglesworth

SPEAKER_1 (0:01)

Callzone Media Hello, and welcome to Better Offline.

Ed Zitron (0:05)

I'm your host, Ed Zitron. Now, I've received a lot of lovely emails from you all about how you've enjoyed the show's slow descent into the madness of the financial markets, and so I wanted to bring on one of the titans of industry, author of A Fabulous Debt, the epic story of how bonds built them on world, none other than Financial Times journalist, Robin Wigglesworth. Rob, thank you for joining me.

Robin Wigglesworth (0:37)

No, thanks for having me on, Ed. I've been looking forward to it.

Ed Zitron (0:40)

All right. So I'm going to start with a very stupid question. What are bonds and why should the average person actually care about them?

Robin Wigglesworth (0:47)

Yeah. Well, actually, it isn't a stupid question because people do get tied up in knots about this all the time, including sometimes people in finance. But they're basically tradable loans. You know how you can buy and sell a stock or a stock marker or an app or a brokerage? Well, bonds are just basically tradable pieces of loans that you can buy and sell just like a stock.

And that can be Treasury bonds issued by the US government. They could be guilds issued by the UK government. In Germany, they issue bonds. In Japan, Japanese government bonds, but also big companies like Apple and IBM, they also issue these bonds, these tradable loans, to finance their big operations. Because the stock market doesn't actually finance that much. It's really mostly a way for investors to cash out. But if I'm IBM or Microsoft, I want to raise a ton of money to invest in something new, like a new factory or data center, I'm going to be issuing a bond to raise the money for that.

Ed Zitron (1:47)

Right. And of course, the French ones are called Obligation Assimilable du Tresor or OATS. Anyway, sorry.

Moving on from that one. Now, so, and you have to be a corporation to issue a bond or a sovereign nation, right?

Robin Wigglesworth (2:03)

Well, you could also be like a multinational organization, like the World Bank issues bonds, the European Union issues bonds. There are individual development banks that kind of state-owned or controlled, but not quite.

You can be Chicago. In the US, actually, you have this insanely huge and vibrant municipal bond market that finances like sewage, hospitals, schools, universities. But even the Church of England has issued a bond. It's kind of where most people actually go to finance. There's over half of all debt in the world is actually in the form of bonds now. And pretty much anybody can issue it, even if you and I can't do it.

Ed Zitron (2:43)

That's interesting. So this is a very specific question. So do cities sell bonds on the public market? Do they sell them locally or is it some mixture of the two?

Robin Wigglesworth (2:54)

A mix. Typically, let's say if I'm Chicago and I want to sell a bond, I'll go to a club of banks. They'll act as the underwriters. They'll basically kind of sometimes basically buy the bond off me at a price and then sell it on to investors because they have contacts and Rolodex of all sort of pension plans, insurance companies, mutual funds around the Americas and the world. But they can also sell to individual investors. Like the municipal bond market in the US is I think four or five trillion. A lot of that is actually bought by individual people in their local municipality. But you can buy, I can go on to a brokerage and buy a little bit of a slice of a US treasury bond, or even a German Bund or a UK guild. Or in France, like it's on OATs.

But some of the stuff is kind of hard to source up. And most ordinary individual investors don't spend lots of time going through the bond market.

Ed Zitron (3:51)

So this is another specific one. So when you go online and you look at the price of a bond, it's always shown in percentages rather than as the price of the bond. Why is that and how should a regular person understand that?

Robin Wigglesworth (4:05)

Yeah, I mean, this is definitely where things get a little bit loopy for a lot of people.

So it's a bond, it's a loan with a fixed interest rate. So let's say if it pays 5% a year, well, because it trades, like if you think the economy is going into recession and everything is going down the drain and you don't want to buy or hold any stocks, you quite want to hold bonds and that 5% looks really attractive, you might pay so much for that loan that it starts trading above the par value. So you're not buying $1 worth of bonds for $1, you're buying $1 worth of bonds for $1.10, for example.