NEW YORK (AP) — The bond market is one of the few forces in the world strong enough to get politicians to snap to attention. It also helps dictate how much ordinary people have to pay on their mortgages and car loans, as well as how much they earn from their savings accounts and 401(k) plans. This was reported by Qazaqyia.kz citing Associated Press.
This week rising bond yields forced the U.S. Treasury Department into an unusual intervention and raised the specter of higher borrowing costs putting the brakes on consumer spending, the lifeblood of the economy. It also sparked concerns that investors might finally be thinking twice about financing a seemingly endless flow of government borrowing.
Here's a look at what's going on and how it affects everyone:
What are bonds?
When governments and big companies borrow money, they don't ask a bank for a loan. Instead, they sell IOUs to investors and promise to repay the money with a certain interest rate. If those IOUs are set to be repaid many years from now, they're called bonds. (IOUs the U.S. government will repay more quickly are more often called bills or notes.)
Investors in the bond market often buy and sell these bonds after they're issued, and they continue to pay the same interest rate. But if the bond starts to look less attractive, a buyer can get bonds that were earlier worth $100 for less than that. Such a drop in price means the new buyer will get a bigger return, percentage-wise, on their money than the interest rate the bond pays on its face value. Those payments are called the bond's yield.
The U.S. bond market is the biggest but investors have other options
The world's biggest and most important bond market is for IOUs from the U.S. government, which are called Treasurys. The total size of it was $31.5 trillion, as of July, according to the Securities Industry and Financial Markets Association.