To the average investor, the bond markets may seem like a concern better left to Wall Street bigwigs. But what happens in these markets can have major implications not only on the larger economy but also on household budgets.
“Keeping an eye on the nearly $32 trillion market for U.S. government bonds, called the Treasury market, is important because it offers a clear signal of where the economy may be headed,” said The New York Times. It can “affect everything from student loans to the housing market.”
Lately, what is happening with bonds has been setting experts on edge. Here’s a breakdown of what to know to make sense of it all.
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How do bond markets work?
Bonds work similarly to loans, wherein someone — in the case of bonds, the government, a company or a municipality — borrows money. When investors purchase a bond, they are effectively funding that loan. They will then earn interest on the loan, known as bond yield, in addition to receiving repayment after a certain period of time.
But “bonds can fluctuate in value,” and typically, “bond prices and yields move in opposite directions from each other,” said NPR. So “if bond prices fall — like they are now — investors demand to be paid more in interest as additional compensation,” whereas “if bond prices are rising, investors are fine getting less in interest since they are holding bonds that are appreciating in value.”
What impact do bond yields have on consumers?
In short: They impact interest rates, which translates to how much people pay to borrow. Mortgages are impacted, given that the “10-year Treasury yield serves as an important guide for mortgage rates as it generally moves in tandem with mortgage-backed securities,” said Yahoo Finance. In addition, “rates on new auto loans and other fixed-rate consumer debt also tend to drift higher as market rates and lenders’ funding costs rise, though the pass-through is not immediate or exact.”
Do the bond market and the stock market affect each other?
Generally speaking, “bond investors and stock investors tend to see things differently,” said NPR, simply due to the nature of the investment itself. While “bond investors care, primarily, about whether they’ll get paid back,” stock investors “tend to make a more straight-up bet on corporate profits.” That can explain why as of this month, the stock market is soaring but the bond market is sounding the alarm.
This divergence will likely only hold true to a certain point, however. Ultimately, “yields matter for investors’ assessment of stocks’ value,” and a “sharp rise in yields or intense volatility in the bond market can irk the stock market,” said CNN Business. Further, if “signs emerge showing that inflation or rising borrowing costs are starting to tamp down economic growth,” then the stock market could very well start showing signs of concern too, said NPR.
