Making sense of the bond market

IF you happen to trade bonds for a living, it is entirely understandable if you are feeling a little anxious these days. Prices for US Treasuries, German bunds and most other securities on the multi-trillion-dollar global bond market have been exceptionally volatile in the last couple of months. In this environment, someone who buys and sells them for a living could lose a fortune by taking an ill-timed bathroom break.

But what happens in bonds matters for the rest of us, too. Bond prices translate into the price to borrow money for practically every family and business on earth, which, in turn, determines savings and investment patterns. In the latest bout of volatility, long-term interest rates in the United States have climbed by almost 0.4 percentage points. Since the interest rate is in an inverse relationship to a bond's price, the value of bond investors' portfolios has taken a hit.

And that helps explain why there has been so much hand-wringing over the ups and downs of the market in the last few weeks.