Bonds have long been considered the most boring type of asset. Even Ian Fleming chose the name "Bond" for his agent because he thought it was unremarkable.
Despite this, bonds have played an important role in the development of humanity. Starting from agriculture and financing wars, ending with electric cars Tesla and Netflix.
“The bond market is the most important market in the world. It is the foundation of all other markets.” – Ray Dalio.
In 2024, the bond market exceeded $150 trillion (more than the entire global stock market). The bond market is currently in a difficult situation, as its biggest enemy, inflation, is gaining momentum.
How did bonds even appear?
In the 12th century, things were going badly in Venice. The Byzantine Empire had arrested all the Venetian merchants in its capital, Constantinople, and confiscated their property. Meanwhile, the Italian city lacked the resources to send a navy to rescue its fellow citizens. So, the city authorities came up with a good idea: borrow money from its residents at 5% per annum. This was the beginning of the birth of bonds.
However, the operation to rescue the arrested merchants ended in failure. The Venetian fleet was destroyed by the plague during negotiations with Constantinople. Defeated by this disaster, Venice was unable to repay its debt to its inhabitants. But other states quickly picked up on this idea and also began to borrow money from their populations.
By the 19th century, bond markets had helped shape the world order. Countries that could finance themselves better tended to be more successful. England’s victory over France was made possible by the bond market, which enabled it to finance its war more efficiently. At the same time, Paris was dependent on short-term loans at high interest rates.
The United States, in turn, used bond sales to purchase Louisiana, build railroads, and industrialize.
It is important to understand: If the ultimate goal is to regulate the economy by changing the value of debt (credit), then the fact that debt financing is increasingly provided by the bond market rather than by banks will inevitably have consequences. The decentralized nature of the bond market means that danger becomes harder to track and avoid.