The market that sets the price of everything

The bond market is larger than the stock market, almost nobody watches it, and it decides your mortgage rate, your house price and what your pension is worth. Here is how it works.

Part of how markets actually work.

The bond market is bigger than the stock market, generates almost no public interest, and sets the price of nearly everything else you own.

Your mortgage rate comes from it. So does what your house is worth, what your pension is worth, and how expensive it is for any company to borrow. If you understand one market you have never thought about, this is the one.

What a bond is

A loan, cut into tradeable pieces.

A government or company needs to borrow. Rather than approach one lender, it issues bonds: promises to pay a fixed amount each year and return the principal on a set date. Anyone can buy one, and — this is the important part — anyone who owns one can sell it to someone else before it matures.

That is what makes it a market rather than a loan. The debt trades.

The one thing to understand

Price and yield move in opposite directions. This confuses everyone at first and is the entire mechanism.

A bond pays £5 a year. If you pay £100 for it, you earn 5%. If nobody wants it and you buy it for £50, you still get £5 a year — now a 10% yield. Same bond, same payments; the price fell, so the return rose.

So “bond yields rose” and “bond prices fell” describe one event. When you read that yields are up, holders of existing bonds lost money.

Why it prices everything else

Government bonds from a stable government are the closest thing to a risk-free return. That makes them the reference price for money itself.

Every other return is quoted against it, explicitly or not:

• Your mortgage is priced off government yields plus a margin for the lender’s risk and profit
• Corporate borrowing is government yields plus a margin for the chance of default
• Share valuations are affected because future company profits are worth less today when a safe alternative pays more
• House prices follow, because prices are set by what buyers can borrow, and what they can borrow depends on rates

This is why a change in bond yields moves everything at once. It is not sentiment spreading between markets. It is the price of money changing, and every asset being repriced against it.

How it actually trades

Unlike shares, most bonds do not trade on an exchange with a public order book. They trade over the counter — negotiated between dealers, over networks, in private.

Consequences worth knowing:

Prices are less transparent. There is no single public price the way there is for a listed share. Two buyers can pay different amounts on the same day.

Dealers are the market makers, quoting bid and ask and earning the spread, exactly as in equities — but with less visibility into what a fair price is.

Liquidity varies enormously. Government bonds from major economies are extremely liquid. A small corporate issue may barely trade, and the spread reflects that.

It is institutional. Pension funds, insurers, banks and central banks dominate. Retail participation is mostly through funds, which is generally sensible given the transparency problem.

The connection to money creation

This is where it joins the rest of the site.

When a central bank does quantitative easing, what it buys is bonds — mostly government bonds. It creates reserves and purchases them from whoever holds them.

That raises bond prices, which lowers yields, which lowers the reference price of money, which lowers mortgage rates and corporate borrowing costs, which raises what buyers can pay for assets.

That is the transmission belt from monetary policy to your house price, and it runs entirely through this market. When people say central bank action inflated asset prices, this is the mechanism, and it is not controversial — it is the intended channel, described in the central banks’ own explanations of what they are doing and why.

What it tells you

The bond market is watched closely by professionals for a reason: it aggregates expectations about inflation and rates into a single observable number, continuously.

You do not need to trade it to use it. If you are deciding about a mortgage, a property purchase, or how much rate risk you can absorb, the yield curve — what the market charges to lend for two years versus ten — is public, free, and more informative about the next few years than most commentary.

What to take from it

Yields are the price of money, and everything else is priced against them.

When yields rise, existing bonds fall. “Safe” assets lose money in nominal terms, which surprises people who bought them for safety and did not distinguish safety-from-default from safety-from-price-movement.

Your mortgage rate is not set by your bank’s mood. It is largely set here, plus a margin.

And it is the quietest important thing in finance. Enormous, consequential, and almost entirely absent from public conversation — which is precisely why understanding it is unusually valuable.

Next: how private markets work, and why you cannot get in.