A moneymaker

But wait. I’d have thought getting a better return on a bond was the whole purpose of investment. Wouldn’t a higher yield be good?

Ben Casselman, the chief economics correspondent for The Times, laughed when I asked him that yesterday. “I get it,” he said. “It’s counterintuitive.” Then he escorted me to a conference room, sat me down like a grade schooler and started to talk. I took notes:

When a government needs to raise money that it hasn’t raised in taxes, it sells bonds. At the most basic level: I give the government $1,000 for a fixed period of time, and in return they give me a fixed rate of interest. They pay that interest regularly over the course of the period — say, 10 years — and at its end give me my $1,000 back.

What’s cool is, I can sell my bond to you, and you get the interest payments for however much time is left on the bond. The market for that is enormous — over a trillion dollars in Treasury bonds are exchanged every day. It’s the most risk-free financial instrument that exists. And every loan that gets made in the economy is benchmarked off its yield.

As for why those yields are rising, he said, the simplest explanation is: inflation. Take Ben’s example. If you think inflation during that 10-year period is going to be at 4 percent instead of 2 percent, then you’re going to want a higher yield, because at the end of 10 years your $1,000 is going to be worth less than when you started — and the whole point was to make money on the deal.

So here’s the cycle, he said. The government sells bonds to pay its bills. It makes debt payments on them — more than it spends on the military, currently — and then issues more bonds to make those payments. Rinse and repeat. To break this dependence, we either reduce deficits or expand the economy. And watch out for inflation along the way! No wonder folks are nervous.

Your money

My colleagues Ron Lieber and Tara Siegel Bernard write about personal finance. They took on the question of what havoc in the bond market means for those of us sitting at home, worried about our investment and retirement portfolios. There’s a reason people own bonds, they write: “Bonds have had lower returns than stocks over time, but they also lack the volatility of stocks.”