Whether you watch TV or stay informed by scrolling social media, the headlines regarding bond yields are hard to miss. The question is, why is everyone concerned about the bond market? To understand that you must first understand what the bond market is. Unlike the stock market where assets are bought, sold, and traded on an exchange, the bond market is a financial system where governments and corporations buy, sell and trade debt securities. 

Every bond represents a debt security but because not all debt securities are bonds it’s best to consider bonds as an IOU for monies lent that will be repaid through fixed interest payments. In case you are curious, CDs and mortgage-backed securities are examples of debt securities that are not bonds. So, back to the question, why is everyone concerned about the bond market? 

In a nutshell, Government bond yields have hit historic rates causing the national debt to increase to $40 trillion and investors to sell off their bonds over fear of soaring debt and inflation. This has made borrowing money more expensive and paying off debt more difficult. Reason being, mortgages, car loans, student loans, and even credit card rates are based on Government bond yields. Consumers are now faced with higher monthly payments on credit cards and higher interest rates on new loans. 

There is one upside to the situation. The astronomical Government bond yields will help cash savers grow their money more quickly as higher interest rates will be paid on cash equivalentslike high-yield savings accounts and CDs. If you have concerns about the bond market and are holding Government bonds in your portfolio, we suggest you ride things out. Remember, what goes up must come down.