The bond market is roughly twice the size of the stock market, and it — not stocks — sets the price of your mortgage and grades every government on Earth. Here's how it works.
An IOU you can trade
A bond is a loan sliced into pieces anyone can buy. Lend the Government of Canada $1,000 by buying its 10-year bond, and it promises small interest payments (the 'coupon') every year and your $1,000 back at the end ('maturity'). Governments, provinces, cities, and companies all borrow this way — globally, well over $100 trillion of it is outstanding.
The crucial twist is that bonds trade after they're issued, and their prices move. If new bonds pay 5% and yours pays 3%, nobody will buy yours at full price — its price falls until its effective return ('yield') matches the market. Price down, yield up; price up, yield down. This inverse seesaw confuses everyone at first and is the key to everything else.
The yield curve: the market's crystal ball
Plot government yields from 3-month bills out to 30-year bonds and you get the yield curve. Normally it slopes upward — lenders demand more for locking money up longer. When it inverts (short yields above long ones), the market is saying it expects rate cuts ahead, which usually means it expects economic trouble. An inverted curve has preceded most modern recessions, which is why the financial press treats it like a storm warning.
For your wallet: Canadian fixed mortgage rates track the 5-year Government of Canada bond yield, not the Bank of Canada's overnight rate. That is why fixed rates sometimes move before the Bank does — the bond market front-runs it.
Grades, risk, and the vigilantes
Not all borrowers are equal. Rating agencies grade bonds from AAA down; below a line, they're 'junk' (politely, 'high yield') and must pay much more. The gap between a risky bond's yield and a government bond's — the 'spread' — is a live meter of fear: it widens in a panic, tightens in calm times.
The bond market also disciplines governments. If investors doubt a country's finances, they demand higher yields, making its debt costlier to carry — a feedback loop that has toppled budgets and governments. The UK's 2022 mini-budget crisis, where markets rejected unfunded tax cuts in days, showed the 'bond vigilantes' are alive and well.
Why bonds belong in a portfolio anyway
For savers, bonds are the steady counterweight: they pay predictable income and usually (though not always — 2022 was the exception) rise when stocks fall, because trouble brings rate cuts, and rate cuts lift bond prices. The classic 60/40 portfolio is 60% stocks for growth and 40% bonds for ballast. The closer you are to needing your money, the more that ballast matters.
The takeaways
- Bond prices and yields move inversely — this seesaw is the market's core mechanic.
- Canadian fixed mortgages price off the 5-year government bond yield, not the BoC rate.
- An inverted yield curve is the market betting on trouble and rate cuts ahead.
- Bonds are the portfolio's ballast: steady income, and usually up when stocks are down.
Words used here — look them up
Educational content, not financial advice. Figures like contribution limits and benefit amounts change annually — verify against CRA, IRS, or your provider before acting. ← All fundamentals