Are you feeling jittery about the bond market? You’re not alone, and in fact, your instincts might be right on the money. As Your Rich BFF founder and CEO Vivian Tu explained in a recent TikTok video, savvy investors are avoiding the bond market, indicating there may be a deeper problem with the U.S. financial markets.
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“We’re seeing a ton of volatility in the stock market,” Tu said. “Typically, that would mean investors would flee to bonds as a safe haven. But instead, this go-around we’re seeing investors sell off U.S. government bonds, signaling a potential loss of trust in the U.S. as a safe financial investment.”
When investors start selling off their U.S. government bonds, it creates a domino effect. Widespread bond selling means that prices go down, Tu explained. As bond prices drop, the yields — the interest payments that bondholders receive — will increase. Yields and bond prices are always in an inverse relationship: When one goes down, the other goes up. This can turn into a vicious cycle, where higher yields drive bond prices lower, leading to higher yields, and so on.
It doesn’t stop there, Tu said. High yields on government bonds also drive up interest rates. As interest rates go up, it gets harder to take out a loan, which means ordinary Americans may struggle to get a mortgage, a car loan or a small-business loan.
Bonds are a form of loan, as Tu explained. When you buy a government bond, you’re effectively lending money to the government. In return, you receive interest over the term of the loan, and then the government repays the loan in full.
Typically, bonds come with a fixed interest rate. The face value of the bond, also known as the “par value,” is also fixed.
So far, so good. It gets complicated, though, if you want to resell your bond before the end of the term. In an uncertain market, the value of government bonds can fluctuate a lot. When interest rates go up, bond yields increase, and the par value of bonds decreases. If you try to resell your bond when interest rates are high, you may not be able to recoup the bond’s full value.
A bond “selloff” means many investors sell, or dump, their bonds in a short period. A major selloff causes turmoil in the bond market and the larger economy. Finance experts say a bond selloff is a sign that people don’t trust the U.S. government, so it can indicate that the economy is in bad shape.
