As someone who studies bonds and sometimes writes about them I dread the times when they become leading news items. It is usually for a bad reason. Markets can get in a panic if governments issue too much debt or if inflation takes off, hitting the value of the bonds and driving up the interest they pay the saver. It leads to a lot of fevered and often badly informed commentary on the media, as the media accept the credentials of some “experts” who struggle to explain a bond in simple language or in some cases struggle to understand the bond themselves.
A bond is a government debt. Many governments like the UK and US borrow large sums from the banks, pension funds, insurance companies and the investing public. They do so by issuing a large new debt for anyone to buy a small portion of the new big loan. The buyer gets an electronic certificate that they have bought a share of the debt which states how much interest they will get on their investment, and when they will get their money back. The UK government will borrow the money for a specified time period with a fixed repayment date (the duration of the loan) and will guarantee to pay a fixed rate of interest every six months throughout the duration of the bond. Inflation linked bonds are different.
These bonds are a convenient way for funds and savers to invest. They know exactly what rate of interest they will get, like making a fixed rate savings deposit with a bank. They know exactly when they will be repaid. More importantly, they know that if their circumstances change and they need to get their money back in a hurry, they can sell their bond to someone else in the market any time it is open. So far so good.
The catch is if you do need to sell before the repayment date, you might not get back the amount you paid the government in the first place, or the amount you paid to buy the bond in the market. If interest rates go up in the meantime the value of your bond in the market goes down, as people will want to get a higher income on your bond than you are getting. They can only do this by paying you less for the bond than the original issue price because the amount of interest paid is fixed. The interest paid is then a higher percentage of their cost of the bond than it was of your original cost of the bond. A bond with no repayment date (like a stock with a very distant repayment date) issued with a promise to pay 1% interest annually will halve if the interest rate goes up to 2%, as the £1 guaranteed interest stays the same so to get 2% on that bond you can only afford to pay £50 for £100 of the original issue. £1 interest is 1% of £100 and 2% of £50.
Where I often part company with the commentariat is when I hear them say these government bonds are safe assets. If you or your pension fund had bought the UK government’s 0.5% 2061 bond at issue you would be sitting now on a 77.5% loss on your original purchase price. So if you had bought £100 worth you could sell it today for just £22.40. These longer dated government loans or bonds are highly volatile. Before covid the Bank of England and the UK government issued a lot of debt at very low interest rates with repayment dates many years ahead. Once interest rates started going up to deal with a bad inflation, you were bound to lose a lot of money if holding these investments. It is true that if you wait until 2061 you will get your money back, but in the meantime you will only be getting an unacceptably low 0.5% on your money when a savings deposit or a shorter dated government bond would pay several times that. If you own the 4.25% UK gilt repaying in December next year you can sell your £100 worth of that for £100 today, or hold and enjoy the 4.25% annual interest for the remaining year and bit when the government sends your £100 back.
It is true that a government bond from a reliable state like the UK or US is safer than some corporate bonds issued by some companies. They might go bust, or get into financial difficulties so they delay or cut the interest payments. The US and UK have met all their interest payments in the past and are very likely to continue to do so. That has not been true of all other governments with some failing to meet payments when they have got into financial difficulties. Germany signed a 1953 Debt Agreement cutting some of its debt obligation by agreement with its creditors. Brazil reneged on some debts in 1987. Since 2020 Sri Lanka, Argentina, Ghana, Zambia, Ecuador, Ethiopia and Lebanon have all defaulted or suspended some payments on debts.
It is untrue to say that any government bond with a very distant repayment date is “safe”. In times like today those bonds will sell off to low prices. They can be ravaged by inflation at any point in their long lives. Both the US and UK governments are having to pay a much higher rate of interest on their borrowings today than at any time this century. That is because they have already borrowed too much and are refusing to rein in their high levels of new borrowing which places more strains on a reluctant bond market. The danger is a doom loop, where higher interest rates drive up the amount government has to pay in interest charges on its debts, which in turn worry the markets as these could become unaffordable.That happened to the UK Labour government in the 1970 s when it ended up having to pay 15.5% on one of the bonds it issued. It then of course had to announce spending cuts to try to get back in control of its runaway finances.
August 22, 2026
A great in depth summary of the bond market by the way.
I cannot see any way out for the current government however. Sands have shifted since the Pandemic and interest rates have changed the bond dynamic greatly, not just in this country obviously.
Labour are seemingly incapable of reform and saving as per their back benches so it can only be a matter of time before the bond market brick wall appears. Not pretty but pull up a chair and enjoy the show, etc.
August 22, 2026
Indeed the rates the government are having to pay are very high indeed, due mainly to a total lack of confidence in the current government and their doom loop, inflationary, anti-growth, tax, borrow and piss down the drain economic agenda. Further damaged by the total lunacy of net zero rip off energy. Even worse than the doom loop tax borrow and waste policies under Cameron, May, Boris and Sunak. Indeed worst they waste they spent money doing net harms on Covid Lockdowns, Covid Vaccines, Net Zero…
Good to see we are getting some prosecution for the Covid Crimes, at least in the USA. In the UK the government are still refusing to release the anonymised statistics, broken down by vaccine types & status. Why might they want to do that if as they claim they saved lives?
August 22, 2026
‘Covid crimes in the USA’ – Fauci pleaded the fifth and walked away unscathed.
I can’t see anything ‘good to see’ over there. Biden had previously pardoned him.
August 22, 2026
When you have to borrow to repay a loan, it’s a sure sign you’re in trouble. The UK government is currently borrowing £2 billion weekly to service the debt and this is rising. This is unsustainable in the long run.
It can only be a matter of time before the IMF is called to sort out the mess. That will be real pain.
August 22, 2026
The USA has a massive debt problem. However, as it is currently a reserve currency, it has been able to live with this.
Now many countries are moving away from dollars. Hence the rise in gold prices. BRICS is also a threat. China will just watch as the USA is a market for their exports – though only 14 or 15% of them. US difficulties are helpful to China in undermining a rival. The current US government alienates so many of its previous allies in the Middle East, Asia & Europe that its’ status as the hegemon may end sooner rather than later.
August 22, 2026
Well if you are borrowing to repay but at a lower rate than the current one it makes sense but with the UK the rates just increase and increase die to zero confidence in Labour’s doom loop policies.
If Labour reversed all their doom loop policies (they all seems to be) net zero, vat on school fees, abolition of non dom status, zero border controls, Chagos, Gibraltar, net cost migrants up, tax rates always, up tax receipts down, red tape up on employers and landlords esp., productivity down, benefits claimants up, tax payer numbers down, wealthy emigrants up…
August 22, 2026
Borrowing to repay even at a lower rate is still lunatic economics. Payments should be out of current income otherwise debts will spiral out of control.
August 22, 2026
Why in disarray? MPs like Mr Brash MP who posted on X (formerly Twitter) stating that public sector workers pay for the private sector, calling the state one of the private sector’s biggest procurers and claiming the private sector “would not exist without taxpayers”.He asserted that people creating a divide between the public and private sectors do not understand how an economy works.
August 22, 2026
Johnathon Brash MP was Head of Psychology at the Independent Yarm School, taught at Newcastle School for Boys and was the Chairman of Hartlepool Sixth Form College.
With teachers like that explaining economics to students and people on X what chance have they got!
August 22, 2026
The world financial system is currently holding $trillions in government debt. Long term gilts/treasuries are over 5%. Add in mortgages, car loans, credit cards etc and global debt nearly doubles.
Eventually this is going to cause the mother of all credit crunches. Many weaker economies are going to default on their sovereign debt. Other assets (equities) will have to be sold to cover margin calls.
Many folk keep their SIPP or Stocks and Shares ISA liquid assets in in short term money market funds, (such as name removed ed) which invest in short term (days) investment grade debt with a weighted average maturity of about six weeks. Funds such as this hold a substantial amount of liquidity in cash and cash equivalents and pay monthly interest slightly above the BoE bank rate. (One such ed) pays about 4.95% The emphasis with these funds is capital preservation under all market conditions. (the ed) benchmark is the Bank of England Sterling Overnight Interbank Average (“SONIA”).
The real risk is inflation. This is why folk buy gold bullion. It pays no interest, but governments cannot print it.
Reply This site does not plug individual funds or give investment advice. There are many different genuinely low risk funds providing decent rates of interest on near cash investments which people can research for themselves or take advice from an Investment professional.
August 22, 2026
Governments can (and indeed do) tax gold sales taxes and CGT and IHT they even tax it on gains that are not real gains as they do no longer allow for inflation. The disaster Gordon Brown 1998 was responsible – he also responsible for giving aways the uk’s gold reserves at the bottom of the market, then he destroyed UK private sector pension investments.
Etc ed
August 22, 2026
I am glad to see the explanation of bonds, especially as someone on GB News remarked yesterday that the man-in-the-street cannot expect to understand the subject (or words to that effect). I think with a little concentration it can be understood, and it is important.
August 22, 2026
Thank you for this – best ever anywhere – explanation of bonds. It should be mandatory reading for Mr Burnham, for every MP and for every budding politician.
May I add a hugely important point which perhaps doesn’t leap out from your superb explanation. When inflation goes up, existing bond values in effect become redundant in value as the government must continue to borrow due to existing government expenditure and has to offer higher interest rates to attract necessary debt, so the Treasury has to offer gilts at yet more attractive, ie higher interest rates. Thus an upwards spiral in government debt is created. Thus our whole economy becomes weaker and in a progressively more devastating downwards spiral. Thus the UK is exploitable by friends as well as foes, China, Russia, EU et al watch and will exploit the situation to suit their political advantage, even the USA has taken advantage of in the past. It is an uncomfortable fact of international and domestic politics that economic weakness will be exploited ruthlessly and relentlessly to the detrimental interest of our whole population.
Reply Thank you. A good addendum re inflation.
August 22, 2026
Weakness indeed, exacerbated by a Labour government and Labour PMs chancellors like Starmer Reeves and Burnham Healey and energy ministers who are doing all the wrong things for any chance or serious growth.
Likely to have at least three more years of this lunacy too.
August 22, 2026
Very clear explanation of Bonds
Thank you
August 22, 2026
Good morning.
I however, do not ! I realise that the only way for governments to stop spending and sending places like Africa and extra £13bn in aid, is for them not to have the means in the first place. They are living off of other peoples futures, people who have no say in the matter. This in my view is immoral.
August 22, 2026
You mentioned that the 2061 bond had fallen from £100 to £22.40. Is the Govt allowed to buy back the bond in the market at this price?
Reply Yes, but it would need to borrow the money to do so so how does that help? The borrowing to buy it would be at the much higher interest rate. Only works if the government cut spending and bought the bond up out of its income. Probably would be more sensible if it had cash spare to buy up debt to buy up the high interest debt.
August 22, 2026
@Jazz – you should ask why is the BoE selling bonds off at a loss when there is no reason too. So far(2026) up-to £125 bn on QE and another £36bn committed over the next 4 years to sell bonds at a loss when there is no reason to do so. All this money is directly from the taxpayer, and has to be clearly removed from other projects.
Who is buying up these taxpayer discounted opportunities, who is making the money from these needless give-aways?
Reply Yes, a bad policy I have long opposed. The private sector savers win and taxpayers lose. The Bank bought the bonds off savers including pension funds at too high a price and are now selling them back at a much lower price.
August 22, 2026
Very good explanation I will print a copy and keep for reference Tks – the expression ‘doom loop’ is something I’ve not come across before but is frightening and could affect us all – scary stuff. Tks murphy dublin
August 22, 2026
In engineering terms doom loop is ‘positive feedback’ something (for example) on an aircraft like ice reduces lift and then that causes something to further reduce the lift, build up even more ice, reduce lift again and so on until you hit the ground.
For controlled flights, cars, rockets, economies you want negative feedback so if lift reduces something then adjusts to increase the lift, lift too high something adjusts to lower the lift.
I once heard a climate change reporter on MSM confusing positive feedback in climate change as being a “positive” thing – perhaps he was english, classics or PPE graduate so beloved of the BBC to explain “science” to us?
August 22, 2026
The bond market is run by professionals. They can spot a mug a mile off. Both Trump and Burnham are mugs. Not personally but the systems they operate turn them into mugs and we and the American people have to pay for it.
In fact a lot of governmental borrowers will have to pay more because the market knows there are very few worthwhile investments to be made. At least in the developed West. But politicians bang the drum for progress and expansion and spending – to keep themselves in a job.
Countries like the USA and UK will not ‘go bust’ very easily but the people can and will be squeezed hard. We have entered a period of stagnation. The easy wins from science since the 1920s have been exploited. Medicine and bioscience are doing well but their product is for ill people and ill people are poor people. AI is touted as the new thing. Any sensible commercial use will put millions out of a job. That dumps the problem firmly on government and that means taxation.
Will Badenoch or Farage be any better? Experience says no.
August 22, 2026
Well all PM since Major have been mugs other then perhaps Truss who was never given a chance by the BoE, the blob and the globalist & net zero Sunak supporters.
August 22, 2026
Bonds certainly tie people in knots and especially ignorant governments and politicians. Debt is a 4 letter word!
Contingent liabilities for future commitments are the other Iceberg waiting unseen by blinkered short term folk and politicians conveniently don’t acknowledge this responsibility.
August 22, 2026
If you borrow at 5% and get a return of 15% + fine but government borrow at 5% and isually piss most of it down the drain often producing zero return or even a negative return with hugely damaging policies like net zero, covid lockdowns, covid “vaccines”, hs2…
August 22, 2026
Bonds are not the only thing in disarray today but a raft of other things that the government throw borrowed money at instead of managing like the NHS at breaking point, with numerous examples in the media.
New Borrowing to pay off Bond Interest is just nonsense and fraud in the Private Sector.
August 22, 2026
The question that is not addressed in your piece Sir John is why do institutions invest is such a volatile instrument?
Because they are required to hold a certain amount of “safe” investments.
Were these safe when the Bank of England undermined the Truss administration?
This arrangement allows banks to continue to print money and make returns on funds they do not have. Thus saving the Bank of England printing money.
A circus.
August 22, 2026
the UK is not a reliable state. the ruling class are flying the country into a cliff face with ongoing massive reliance on borrowing, out of control immigration, the most expensive electricity on the planet, so much so that civil war now looks inevitable.
the money in my pension fund is already taxed too much, and this looks likely to increase.
the productive population is very small, and it could well move abroad in ever greater numbers abandoning the UK to its doom loop of spending more than it earns.
In 20 years time the demographics of the UK will have changed and it will not be a high trust society, rapes will be on every street every day, and the country will be as attractive a proposition to the debt markets as Afghanistan is now.
you are being too optimistic john, the bubble will burst.
August 22, 2026
“If socialists understood economics they wouldn’t be socialists.”
― Friedrich Hayek
August 22, 2026
Very good explanation. Too often it is assumed that all “clever” people know this. Quite often it becomes apparent that they do not.
What about that other way of obtaining funds, “printing money”? Perhaps you might sometime do a similar piece on that, and the relationship it has to inflation, and inflation itself as a tool that can be used/abused by government?
Reply Yes, good idea. Not an immediate priority but will get round to it.
August 22, 2026
Simple…”inflation is everywhere, and at all times, a monetary phenomenon”…von Mises…or was it Milton Freedman…
August 22, 2026
At the end of the day this it becomes a clear and proven ‘fact’ that the BoE, OBR, The UK Establishment, the UK Parliament and its Government are not fit for purpose.
Someone is making huge profits which on the face of it might be seen as a result of someone else’s ineptitude. The Taxpayer at great expense is being forced into the lining the pockets of a few. That creates the conspiracy of who are the ‘few’
The Markets never lose, and on current record the BoE itself never looses, as someone else (the taxpayer) is funding the games being played out.
August 22, 2026
Good morning Lord Redwood.
I would be interested in your view as to whether the big bond holders have an interest in maintaining a pretence their government bonds are worth more than they are. None of them want to be the one to pull the plug and precipitate a market panic.
My prediction is that when things go wrong, the market correction will be catastrophic and it will happen without warning.
Reply Of course bond holders hope their bonds deliver a good return. They can help by not selling their bonds.
August 22, 2026
Thanks for your clear explanation today John, I often wonder if many of our past, and even present Chancellors really fully understand the complex ways in which the Countries finances work, given some of the budget decisions made over the years.
The simple fact is you cannot borrow for ever, without some sort of expensive payback plan, so you really need to cut expenditure if you want to improve the financial outlook, you cannot for ever keep spending more than you earn/raise in taxation which also has a limit, which we also seemed to have passed.
August 22, 2026
It’s interesting to contrast the current situation with that in 2015 when Osborne was able to buy back and cancel the entire outstanding balance of undated government stock. All those 2½% and 4% Consols, all that 3½%Transport stock that I used to follow in the Telegraph City pages when I was a schoolby in the 1960s…. all gone, redeemed at par at a time when 4% money seemed far too expensive.
That redemption doesn’t seem such a good idea now. The confidence trick that is an undated bond could not be pulled off these days, people would not fall for it any more.
I have always felt that buying gilts was a mugs game. There is little upside, and a good chance that the investment will go sour, like that ½% 2061 bond which was issued in 2020. Buy them now at £22.50 and hold until they are redeemed you get a yield of about 5½%. I’ve a feeling that’s not going to seem such a good deal in a year’s time.
August 22, 2026
JD Vance speech about how bad it is replacing American programmers with cheaper ( foreign ed) replacements is spot on. And shows the UK politicians up as useless, as not a single one of them anywhere in the spectrum has made a similar speech about replacement of British IT workers with cheaper (foreign ed) workers.
August 22, 2026
and JD Vance has no problem naming the country they mainly come from, sadly John thinks that truth needs editing
Reply I think they come from more than one country
August 22, 2026
sure some come from Bulgaria, Romania, etc but those numbers are absolutely dwarfed by the vast numbers from India, its not even close.
August 22, 2026
It is like comparing pink cars with silver cars. Sure you might see the odd pink car driving around, but the numbers of silver ones on the roads completely swamps them. The proportions are similar if not worse.
August 22, 2026
An excellent explanation of how the bond market works. Surely our new PM and Chancellor should see the red warning lights flashing in the bond market, even if their MPs do not!
We hear not a word from our new PM and Chancellor about cutting government spending, which is the only way back to financial sanity for the UK. The cost of borrowing will sink the UK economy if it is not faced up to and addressed by the government.
Our current situation is like being in a car with a crazy driver. You know the crash is coming; you just don’t know exactly when!
August 22, 2026
Once again, your worries about fixed interest markets are highly reminiscent of what happened in the 1970s when Government spending and inflation ran riot, at the same time as chaos in the oil market. It is beginning to look highly likely that Mr Burnham’s policy of taking us back to th1970s will be very successful indeed.
August 22, 2026
Neither the UK nor USA has always met their interest payments.
The British Great War debt to the USA remains unpaid and interest hasn’t been paid since the mid 1930s.
The USA in 1971 defaulted on its obligation to redeem US Dollars for gold at $35 per ounce. It has since been paying “interest” with very nicely printed pieces of paper…or the digital equivalent.
The great inflation of the 1970s was caused by precisely that action. The “oil shock” similarly so caused when the Arab producers wanted the equivalent amount of devalued dollars per barrel as those dollars would buy gold.
Despite both countries pretending they are “sound”…they aren’t.
Reply Coming off the gold standard is not the same as failing to pay interest or failing to repay debt when due. Of course governments inflate and that erodes the real value of the interest and capital repayments, but it does not break the rules of fixed income debt.The US voluntarily suspended our payments on WW1 debts in 1931 as part of a package to deal with the financial crisis. Attempts to renegotiate these debts failed and the US did not pursue the matter further.
August 22, 2026
Reply to reply
The “rules of fixed income debt” are, like much in the financial world a fraud on those holding it.
The “Nixon shock” was a default in real terms, rather like “the pound in your pocket hasn’t been devalued”…it certainly had.
August 22, 2026
Just scanned an item on the Euronews website regarding the USA USD 40Tn debt. 76% is held domestically whilst 14% is held by foreign countries. UK holds USD 0.94Tn of US debt. Second only to Japan. The US economy is perceived to be strong whilst ours is weak. Is being a creditor of US debt considered to be a benefit to us as the US has a strong economy? As you can see I am no financial expert. I just like to know.
Reply The UK may well benefit from holding investments in the US, but like all financial assets they may have some poor periods.
August 22, 2026
Are others waking up to what Lord Redwood has been saying for ‘years’
From the Telegraph today Jeremy Warner
“The Bank of England is costing the taxpayer billions. It must stop
The decision to sell gilts in the midst of a global bond market rout makes no sense” …..
https://www.telegraph.co.uk/business/2026/08/22/the-bank-of-england-is-costing-the-taxpayer-billions/
August 22, 2026
The President Trump incumbency gets right up the snooty nostrils of our media(broadcast and press)
He won his election on MAGA which resonated with his electorate.He is squeezing the nuts of every
country that,in his opinion,has been extracting the Michael.I don’t know how important the Hormuz Straits
are to USA nor IRAN nuclear war potential.USA has only two countries of concern to their security and
welfare:Russia and China.Just as our economy is being drained by “economic and charitable” billions of aid
to many countries so is USA(NATO members not meeting their responsibilities) let us be grateful that
President Trump likes us(as do the great majority of thinking Americans) otherwise Argentina would have
the Falkland Islands quick as a flash
August 22, 2026
@Sidney Ingleby – the Establishment the Media live in fear that some one might suggest the UK starts to find ways to fend for itself, call out those that fight against reciprocol and mutal trade and understanding. Or in other words push this Socialist left wing cabal aside and just let us all get on with life
August 22, 2026
I recall government 10-year gilt yields being very high, ca. 15 or 16%, in 1981 – during the first Thatcher administration. Presumably the bond hawks did not believe Howe’s intention to throttle back spending, as the problems inherited from Healey and Callaghan still worked their way through the system, and unemployment was still very high. (The March 1981 letter from 364 economists challenging the government’s economic policies can’t have helped Britain’s credibility with the international lenders: in fact it is possible the intention of these largely leftwing academics was to overthrow the government and re-install Labour, in the same way the BoE and many Conservative MPs more recently briefed and acted against Truss.
The Dresdner Bank in Germany bought up quite a lot of the bonds and sold them to their customers on a hush-hush basis (why so secretive, I’ve no idea). I recall buying quite a few at a 12% interest rate. Very nice too.
Reply Long gilt rates started high under Thatcher owing to inherited inflation. Fell as the Conservatives got deficit and inflation under control. The big peak came under Labour in 1970 s with their issue of a 15.5% bond 1998 repayment.