Opinion: If you understand bonds, you understand the future — here’s how

When you think about investing, you probably picture stocks — big-name companies, crazy returns, and potentially even a little bit of risk and excitement. But there’s another side to investing that’s just as important: bonds. If you’re a Grinnellian trying to build financial literacy (or just trying to understand what’s happening in the economy), bonds are something you cannot ignore. Here’s a quick guide to what bonds are, why they matter, and why even college students should start paying attention. 

At the simplest level, a bond is basically an IOU (literally an abbreviation for “I Owe You”). When a government, company, or even a school district needs money, they don’t always go to a bank. Instead, they issue bonds — they borrow money from investors like you. In return, they promise to pay you back later with a little extra (called interest). When you buy a bond, you’re lending money. The interest you earn is called the yield, and yield is determined by how willing investors are to lend money. If no one wants to buy a company’s bonds due to risk of bankruptcy, the price will fall and the yield (return) will rise. This risk is measured by credit ratings; even companies have to worry about their rating! When the bond “matures” (ends), you get your original money back too. That’s it. Bonds are loans you give instead of loans you take. 

For further context about credit ratings, here is a graph we made of how Moody and Standard & Poor, two of the largest credit rating companies in the world, rate entities credit: 

As we can see, investment grade bonds are much safer than junk bonds. An investment grade bond is one that is unlikely to fail to pay you back. For example, the government is (hopefully) never going to default on its debt and can be assumed to be an extremely safe investment, hence why a bond issued by the government, a treasury bond, is an investment grade rating. In fact, most firms communicate that government bonds are default risk free (will never fail to make a payment). A junk bond is a bond more likely to fail to pay off its debt. For example, one of the riskiest kinds of bonds you can get is called an adjustment or income bond (yes, it sounds contradictory), which is a bond from a company that just declared bankruptcy. Basically, you’re giving a company that failed money to try again, hence the junk grade rating. So, why would people buy junk bonds? Well, they provide higher yields, or returns, than investment grade bonds to be a more appealing investment. 

Bonds are often safer investments than stocks. Stocks go up and down — sometimes a lot — but bonds, especially U.S. government bonds due to their high credit rating, are usually more stable. That makes bonds important for protecting wealth, especially in tough times. Learning about them now sets you up to invest smarter later. Also, bond yields can actually predict the economy. 

You might be wondering, what’s a bond yield curve and why should you watch it? Imagine a graph that shows how much different bonds are paying in interest depending on how long they last — like a 2-year bond versus a 10-year bond. That’s the yield curve. Normally, longer-term bonds pay more, because you’re locking up your money for a longer time. When short-term bonds start paying more than long-term ones, that’s a major red flag. Ever heard the phrase “inverted yield curve”? That’s when short-term bonds pay more than long-term bonds, and it’s a big deal because it often signals a coming recession. The yield curve basically shows the mood of the economy: a normal curve means things are steady, a flat curve means people are nervous, and an inverted curve suggests a recession might be coming. Watching bond yields can give you a sneak peek into where the economy is heading — way before it shows up on the news. 

Even if you’re not investing right now, bonds affect you. Student loans and interest rates are closely tied to bonds. Interest rates for your loans, credit cards, and even future mortgages are heavily influenced by the bond market. When bond yields rise, borrowing money gets more expensive for everyone. Paying attention now can help you make smarter decisions later, whether you’re thinking about taking on debt or saving for the future.  

At the end of the day, Grinnellians should start learning about bonds now because it’s an easy way to be ahead of the curve — literally. You’ll sound like a genius to your grandmother when you can casually explain what’s happening with bond yields. You’ll make better money moves when it comes to saving, investing, or borrowing for your future financial goals. And you’ll have a better understanding of the bigger picture of the market, including jobs, inflation, and future opportunities. You don’t have to be a finance major to care about bonds. You just have to care about your future.