Welcome to Ask Fear and Greed, where we answer questions about business, investing, economics, politics and more. I'm Michael Thompson. Hello, Sean Aylmer.

Welcome to Ask Fear and Greed, where we answer questions about business, investing, economics, politics and more. I'm Michael Thompson. Hello, Sean Aylmer.

And Michael, what's the grid on your face for?

And Michael, what's the grid on your face for?

Because this question today is just It would almost be one that you had written yourself this question if it hadn't come from Craig on LinkedIn. And so Craig wrote us, say a note and he says, Hi, one for the Ask Fear and Greed. Can you please explain a dummies guide to government bonds? Ah, he says, I suspect many don't know what they are and how they work. And I think I'm reasonably intelligent, and I find them a bit hard to understand.

Because this question today is just It would almost be one that you had written yourself this question if it hadn't come from Craig on LinkedIn. And so Craig wrote us, say a note and he says, Hi, one for the Ask Fear and Greed. Can you please explain a dummies guide to government bonds? Ah, he says, I suspect many don't know what they are and how they work. And I think I'm reasonably intelligent, and I find them a bit hard to understand.

I think they're really hard to understand. So I mean, I'll try and give a dummies guide, but what it is once you get the basics, there are so many kind of add ons in the government bond. In the bond market will stick to government bonds, so most manilla a bond just an iou right? So governments issue bonds to cover the spending they can't fund through taxes, and revenue tax comes in, you've got a big deficit, You've got to pay for it somehow. You issue a bond, right, I owe you this money. So they go to a super fund. So you know, give U one hundred million bucks and we'll pay for what we're spending our money on and we'll pay you back in the future. So that's all kind of it's just alone, as fairly is. The safest investment in financial markets is a US government bond. They're safer than banks, right because a bank can fail, but a government can literally print money. Same deal in Australia. Safest asset in Australia an Australian bond because they are considered the risk free rate of return, although theoretically there's always risk.

I think they're really hard to understand. So I mean, I'll try and give a dummies guide, but what it is once you get the basics, there are so many kind of add ons in the government bond. In the bond market will stick to government bonds, so most manilla a bond just an iou right? So governments issue bonds to cover the spending they can't fund through taxes, and revenue tax comes in, you've got a big deficit, You've got to pay for it somehow. You issue a bond, right, I owe you this money. So they go to a super fund. So you know, give U one hundred million bucks and we'll pay for what we're spending our money on and we'll pay you back in the future. So that's all kind of it's just alone, as fairly is. The safest investment in financial markets is a US government bond. They're safer than banks, right because a bank can fail, but a government can literally print money. Same deal in Australia. Safest asset in Australia an Australian bond because they are considered the risk free rate of return, although theoretically there's always risk.

So the closest thing to a closer.

So the closest thing to a closer.

Thing every anything else is priced off government bonds. This is why we care so much about them. So your mortgage is priced off whatever the government bond rate is. Equities, business lands, credit cards, the whole shebang. It comes down to the foundation rate of return.

Thing every anything else is priced off government bonds. This is why we care so much about them. So your mortgage is priced off whatever the government bond rate is. Equities, business lands, credit cards, the whole shebang. It comes down to the foundation rate of return.

In order to truly answer Craig's question, can you give us paint a picture for us, give us an example.

In order to truly answer Craig's question, can you give us paint a picture for us, give us an example.

It's probably so. Let's end the government sells a bond to an investor for a million bucks.

It's probably so. Let's end the government sells a bond to an investor for a million bucks.

Gotcha right, yep, A lot of the way that you're looking at me, just go has he understood that Part'm like, yes, I got that partch on.

Gotcha right, yep, A lot of the way that you're looking at me, just go has he understood that Part'm like, yes, I got that partch on.

Okay, they pay interest on that. They call that a coupon rate. Okay, let's say it's five percent. That means Michael Thompson's buying the bond for a million bucks and getting fifty thousand dollars coupon payment every year.

Okay, they pay interest on that. They call that a coupon rate. Okay, let's say it's five percent. That means Michael Thompson's buying the bond for a million bucks and getting fifty thousand dollars coupon payment every year.

Yep with me so far, Yep, sounds good to me.

Yep with me so far, Yep, sounds good to me.

Excellent. Then you think to yourself, hmm, I'm getting on this, but I actually wouldn't mind investing somewhere else. I wouldn't mind getting the million bucks back and investing in inequities or spending at some you know, buying a new house or doing whatever. Okay, So you can sell that bond in what they call the secondary market. So there are other people out there who might like the safety of a bond. Say, okay, we'll buy that from Michael good great, okay, million dollar bond, five percent coupon rate. You go to the market to sell ex you don't want it anymore, but things have changed. No one's going to give you a million dollars for that bond anymore because returns only five percent, and stuff's happened. So I say, okay, Michael, well give you nine hundred thousand dollars for that bond, oh dear. But you think, well, I prefer to have nine hundred thousand dollars and invest it somewhere else, or buy a house, to do whatever you're doing. So you say, okay, you take the nine hundred thousand. The person that buys it, Sean takes a nine hundred thousand. I'm still getting that five percent coupon rate. So my return, which they called the yield, is fifty thousand on nine hundred thousand. Yours was fifty one million.

Excellent. Then you think to yourself, hmm, I'm getting on this, but I actually wouldn't mind investing somewhere else. I wouldn't mind getting the million bucks back and investing in inequities or spending at some you know, buying a new house or doing whatever. Okay, So you can sell that bond in what they call the secondary market. So there are other people out there who might like the safety of a bond. Say, okay, we'll buy that from Michael good great, okay, million dollar bond, five percent coupon rate. You go to the market to sell ex you don't want it anymore, but things have changed. No one's going to give you a million dollars for that bond anymore because returns only five percent, and stuff's happened. So I say, okay, Michael, well give you nine hundred thousand dollars for that bond, oh dear. But you think, well, I prefer to have nine hundred thousand dollars and invest it somewhere else, or buy a house, to do whatever you're doing. So you say, okay, you take the nine hundred thousand. The person that buys it, Sean takes a nine hundred thousand. I'm still getting that five percent coupon rate. So my return, which they called the yield, is fifty thousand on nine hundred thousand. Yours was fifty one million.

Oh so the coupon rate is off the original.

Oh so the coupon rate is off the original.

The coupon rate never changes. That's why it's called fixed income. Okay, all right, all right, the concepts you've got to think of the price, yep, the coupon rate, the yield. The yield is what I get back because I've paid less for it. The price is falling, I get back, so kind of it's always counterintuitive when bond prices four yields rise. That's actually the main thing you've got to remember.

The coupon rate never changes. That's why it's called fixed income. Okay, all right, all right, the concepts you've got to think of the price, yep, the coupon rate, the yield. The yield is what I get back because I've paid less for it. The price is falling, I get back, so kind of it's always counterintuitive when bond prices four yields rise. That's actually the main thing you've got to remember.

I get that, don't laugh. I genuinely get that.

I get that, don't laugh. I genuinely get that.

That is a So when you hear about to sell off in bonds, what you're saying people are paying less for them. We don't want these bonds, And that's what happened in the US last week. We're worried about US bonds. We don't want them as much. So the price is four their returns go.

That is a So when you hear about to sell off in bonds, what you're saying people are paying less for them. We don't want these bonds, And that's what happened in the US last week. We're worried about US bonds. We don't want them as much. So the price is four their returns go.

Up, and that's in the secondary yield.

Up, and that's in the secondary yield.

That's all in the secondary market. Understood. Once you know that coupon rate of five percent, you kind of forget about that. You just worry about the price in the YIELDEP and so the yield, and that makes sense because if people think, oh, sorry, look you're looking at me.

That's all in the secondary market. Understood. Once you know that coupon rate of five percent, you kind of forget about that. You just worry about the price in the YIELDEP and so the yield, and that makes sense because if people think, oh, sorry, look you're looking at me.

No, no, no, no. The look on my face is like it is an epiphany right now because you've just explained that in such a clear way.

No, no, no, no. The look on my face is like it is an epiphany right now because you've just explained that in such a clear way.

The next stair, which I'll probably just confuse matter so you understand what's going on so far.

The next stair, which I'll probably just confuse matter so you understand what's going on so far.

One hundred percent. I was hoping that was where I was going to finish, because then I would be with YEP.

One hundred percent. I was hoping that was where I was going to finish, because then I would be with YEP.

Last week, the US government tried to raise money. They wanted to issues and bonds. Right all of a sudden, though, people are getting a yield of you know, let's say five point six percent, not five percent. They paid less. The new bonds are going to the market right at a million dollars. Still, the coupon rate suddenly has to match what's in the market. Okay, So the upon rate goes to five point six percent, not five percent.

Last week, the US government tried to raise money. They wanted to issues and bonds. Right all of a sudden, though, people are getting a yield of you know, let's say five point six percent, not five percent. They paid less. The new bonds are going to the market right at a million dollars. Still, the coupon rate suddenly has to match what's in the market. Okay, So the upon rate goes to five point six percent, not five percent.

Okay, No, I do get that, get that?

Okay, No, I do get that, get that?

Yes, And what happened last week is the US government said, Okay, we're going to issue new bonds. Oh, okay, we have to play a higher coupon rate than we did three months ago. Yep, because we need to compete with what's going on in that secondary market. And that's why bond markets rule, because the US government's like, oh, hold on, that's just increased the cost of debt. Donald Trump's trying to cut costs. No, no, He's actually just bought himself a lot more debt by pushing up that coupon rate. And so when we say bond markets rule, bond markets do rule because they said interest rates on everything else, they're risk free. But also they determine what the government has to pay to raise money.

Yes, And what happened last week is the US government said, Okay, we're going to issue new bonds. Oh, okay, we have to play a higher coupon rate than we did three months ago. Yep, because we need to compete with what's going on in that secondary market. And that's why bond markets rule, because the US government's like, oh, hold on, that's just increased the cost of debt. Donald Trump's trying to cut costs. No, no, He's actually just bought himself a lot more debt by pushing up that coupon rate. And so when we say bond markets rule, bond markets do rule because they said interest rates on everything else, they're risk free. But also they determine what the government has to pay to raise money.

I think, not only have you done Craig a service today, you have done everyone who's ever been unsure about how bonds work a service.

I think, not only have you done Craig a service today, you have done everyone who's ever been unsure about how bonds work a service.

Now, this is very vanilla. There are all sorts of iterations and you get corporate bonds. And as long as you understand the basics, yeah, we can do basics, we can a lot. I'm about to suggest this, We're going to do a whole series on bonds. Let's not. Let's leave, by the way.

Now, this is very vanilla. There are all sorts of iterations and you get corporate bonds. And as long as you understand the basics, yeah, we can do basics, we can a lot. I'm about to suggest this, We're going to do a whole series on bonds. Let's not. Let's leave, by the way.

Unless we rename them, as we've discussed before, give them a sexy name like James Bond, James Bonds.

Unless we rename them, as we've discussed before, give them a sexy name like James Bond, James Bonds.

Or Alan Bond's Alan Bond's Yeah, not so good ones the Alans and really good ones to James Bonds.

Or Alan Bond's Alan Bond's Yeah, not so good ones the Alans and really good ones to James Bonds.

And if you guys really well, it's bonds a time to rap u Yeah, I think that'll do us. Craig, Look, you know what I don't even need to say. I hope we answer the question because I know that Sean has done a good job of answering that one. I hope you enjoy it. And if you have your own question that you would like us to answer them, please send it on through. Do it, Craig. Did jump onto Instagram or LinkedIn or Facebook or go to Fear and Greed dot com to are you and send us a question while you're signing up for the Fear and Greed Daily newsletter on the same website. Thank you Sean, Thank you Michael oh Michael Thompson, and that Ask, Fear and Greet

And if you guys really well, it's bonds a time to rap u Yeah, I think that'll do us. Craig, Look, you know what I don't even need to say. I hope we answer the question because I know that Sean has done a good job of answering that one. I hope you enjoy it. And if you have your own question that you would like us to answer them, please send it on through. Do it, Craig. Did jump onto Instagram or LinkedIn or Facebook or go to Fear and Greed dot com to are you and send us a question while you're signing up for the Fear and Greed Daily newsletter on the same website. Thank you Sean, Thank you Michael oh Michael Thompson, and that Ask, Fear and Greet