What is the bond market and why does it matter: An explainer
Editorial staff, J.P. Morgan Wealth Management
- U.S. bonds have historically been considered a reliable option for many kinds of investors.
- As of mid-2025, the bond market has been a hot topic for both investors and consumers because of its volatility.
- Changes in the bond market can cause huge ripple effects in the overall economy.
What is the bond market and how does it work?
The U.S. bond market refers to the market for U.S. government bonds. Corporations sell bonds, too, but when people mention the bond market, they’re typically talking about U.S. government bonds. Investors – including individuals, institutions and even foreign governments – can buy and sell U.S. government bonds, with the proceeds going to pay for government projects and activities.
Both U.S. citizens and international investors can invest in American Treasuries, which are often considered a safe option because of the U.S. government’s historically high credit rating.,
People, institutions and government entities can buy bonds directly from the U.S. Treasury website. They can also buy bonds from a bank or broker on the secondary market.
The bond market functions differently from the stock market: Purchasers can buy bonds, then wait until they mature – collecting the principal and interest earned on it – or sell them early.
Like the stock market, the bond market is extremely sensitive to economic news. For example, the bond market reacted negatively when President Donald Trump announced a round of tariffs in the spring of 2025.
What types of government bonds are available?
Several types of government securities are available for purchase: bonds, bills and notes.
Treasury bonds have the longest maturity; investors can purchase either a 20- or 30-year bond.
Treasury bills, or T-bills, have shorter maturity dates than bonds. Investors can buy a T-bill with a maturity date as short as four weeks or as long as one year.
Treasury notes have maturity dates of two, three, five, seven or 10 years.
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What should investors watch when it comes to the bond market
When you are watching the bond market to assess the health of the market itself and what it’s indicating about the economy at large, it can be helpful to keep an eye on some of these indicators:
- The bond market’s yield-curve shape: The relationship between short- and long-term Treasury yields – the interest that is paid to bondholders – can be important to watch. A normal upward-sloping curve may suggest healthy growth expectations, while an inverted curve has historically preceded recessions. A flattening curve may indicate slowing growth expectations.
- 10-year Treasury yield rates: This benchmark rate may reflect long-term economic expectations and inflation outlook. Rising yields may signal growth optimism or inflation concerns, while falling yields may indicate economic weakness or flight-to-safety demand.
- Bond market yields: Rising bond yields may suggest strong economic fundamentals, while falling or negative real yields may indicate economic concerns or excessive monetary stimulus.
- Bond market volatility: High volatility in bond prices may reflect uncertainty about the economic direction of the country or Federal Reserve policy.
- Foreign demand and dollar strength: Strong foreign buying of U.S. Treasuries during global uncertainty may demonstrate the dollar’s safe-haven status. Conversely, foreign selling may signal reduced confidence in U.S. fiscal health.
How does the bond market impact the broader economy?
The bond market’s performance is one indicator of how the overall economy is functioning. For example, a solid bond market can increase trust among investors that the U.S. government can cover its debts; this, in turn, can encourage more overall investing.
Conversely, investors purchasing fewer government bonds may signal less faith in the U.S. economy. Interest rates can increase under these circumstances, which may not be a good thing for the average consumer.
Interest rates may be lower on mortgages and auto loans when the bond market is doing well. When bonds are doing poorly, however, rates may increase.
How does the bond market affect mortgage rates and interest rates on other loans?
The average interest rate for a 30-year mortgage is related to returns on the 10-year Treasury note. If yields for the latter increase, then consumers will likely find themselves paying higher rates for mortgages. The same is true for auto loans and other loans.
How does the bond market affect credit card interest rates?
Interest rates on credit cards depend on many factors, including the performance of the bond market. This relationship between credit card interest rates and the bond market is because most credit cards have variable interest rates tied to the prime rate, which moves with the federal funds rate – a key benchmark set by the Federal Reserve. This is heavily influenced by the bond market.
The bottom line
The bond market tends to provide a real-time barometer of economic health – bond yields often reflect investor expectations about inflation, growth and Federal Reserve policy, while the yield curve shape can signal potential recessions or recoveries. That said, be mindful of overacting to movements in the bond market just as you would with the stock market when it comes to adjusting your investment portfolio. It may help to consider the bond market an indicator, among many, regarding the state of the economy’s health.
Frequently asked questions about the bond market
Some investors assume that government-issued bonds are a safer bet compared to stocks, mutual funds and exchange-traded funds (ETFs) because they are backed by the full faith and credit of the U.S. government. To most people, a safe investment usually means one that will not decrease in value over time.
This is not necessarily true for bonds, however. The value of bonds can go down. If you sell a bond before it matures, you may end up selling it at a loss. The only way to ensure you receive the full principal on a bond is to wait until the bond has fully matured, and even in those instances the money you receive – your principal plus interest – may buy you less than what you originally invested because of inflation.
Needless to say, there are many considerations to make with bonds, and it’s a misconception to say that bonds are a total safe haven.
Put simply, yes. Although it may seem like you’re required to hold a bond until the maturity date, you are in fact allowed to sell it before that time, and many investors do sell their bonds before the maturity date of the bond. When you sell bonds before their maturity, you typically do so on the secondary bond market.
While a bond’s coupon payment stays the same, a bond’s market value changes as prevailing rates move. It’s important to understand the difference between the fixed rate your bond pays (which never changes) and the constantly shifting market rates that determine what your bond is worth if you want to sell it early.
The U.S. government has never defaulted on Treasury bonds, but it did once make late payments to bondholders in 1979, and that occurred because of debt ceiling issues that resulted in the government having to pay higher interest on its debt.
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Editorial staff, J.P. Morgan Wealth Management
