- [Jordan] These are government bonds.
(transition thudding)
Even if you know nothing about them, you might have heard.
- Treasuries have proven always to be a reliable,
safe haven investment.
- Recession fears have caused investors
to flee to safe investments like Treasury Bonds.
- U.S. Treasury Bonds are a pretty safe investment.
- Nothing can touch them
- [Jordan] But there's a caveat.
Not all bonds are the same.
Some let you take a bit of a gamble by selling them.
And if you do, like Silicon Valley Bank had to,
you introduce the one thing
that everyone says bonds don't have, risk.
We break down how the fail safe investment can fail.
And why despite that, bonds are still so safe.
(gentle music)
(upbeat music)
Bonds are IOUs.
- The government gets a lot of money from taxes
but it spends more money.
So it has to borrow money.
- [Jordan] And that's where bonds
aka Treasury securities come in.
You give the government money
and it promises to give it back at a later date
with some interest.
And the government takes this promise very seriously.
This makes bonds an ideal investment if safety,
rather than a large return, is an investor's top priority.
Bonds tend to be a popular investment tool for retirees,
investors looking to add some cushion to their portfolio,
or parents looking to start their kids' college fund.
And the bond market, as we know it today,
can be traced all the way back to the First World War.
(tape whirring)
- [Narrator] From a pistol shot at Sarajevo,
the first the great modern world wars explode.
- [Jordan] In 1917,
the U.S. government released Liberty Loans,
a type of bond meant to garner public support
and funds for the war.
People could cash them in typically 10 to 30 years later.
Ultimately, Liberty Bonds raised more than $17 billion.
That's 2/3 of the funds America raised
for the First World War.
It marked the birth of the modern Treasury market
and introduced investing to many Americans.
♪ We've got another bond to buy. ♪
- The government issued more war bonds during World War II.
After the war, they were converted to savings bonds.
- [Narrator] It's your future.
Build for it, save for it.
Buy shares in it.
- [Jordan] We still have savings bonds today.
Like war bonds,
they can only be bought directly from the government,
and you can't sell them.
Though, you can transfer them to people as gifts.
- (indistinct) gift, Merry Christmas.
- Thank you.
- [Jordan] The only thing that could prevent you
from getting your money when your savings bonds mature
is if the Treasury defaulted.
Okay, it wouldn't look like that,
but the government defaulting on its debts
would be catastrophic.
However, it's incredibly unlikely to happen.
- The fact that everybody thinks
that treasuries are safe helps make them safe.
Investors around the world just pile into treasuries.
That makes it very, very easy
for the U.S. government to raise more money
in the bond market.
- [Jordan] This perpetuates a cycle.
People buy bonds from the government.
The government spends the money.
It issues new bonds.
And then it uses some of the new bond money
to pay everyone back.
Plus.
- The US government can always raise taxes
or cut spending in order to pay back its bond holders.
- [Jordan] So the way to introduce risk to bonds
really comes from, well, you.
Not all bonds function like savings bonds.
Take these securities, Treasury Bills, Notes, and Bonds
you can buy in the primary market,
meaning you get them new in a government auction.
Or the secondary market,
meaning you buy them from another seller.
And unlike savings bonds, you can sell these bonds
to someone else in the secondary market before they mature.
But if you do, you introduce risk.
So why take a perfectly safe investment
and make it less safe?
- The benefit of the secondary market
is that if you need the money, you can always sell the bond.
And you don't have to wait 10 years until the bond matures.
- [Jordan] But if you sell a bond,
you're not guaranteed to get the face value you paid for it.
That's because a bond's value in this market
is always changing.
In that way,
the bond market looks a bit like the stock market.
To understand how this risk works in the real world,
let's look at Silicon Valley Bank
- Silicon Valley Bank was getting a lot of money in
from the tech sector,
and it needed a place to put that money.
- [Jordan] So it bought billions of dollars
of medium to longer term notes and bonds
for the same reason anyone buys them,
they're a safe place to park money for a while.
However, at the time the bank bought these bonds,
the interest rate on the bonds was low.
If the bank had been able to hold its bonds to maturity,
then the interest rate wouldn't have mattered.
The bank would've cashed in their billions, plus interest,
and that would've been that.
Instead, a few things went wrong.
to ease rising inflation,
the Treasury increased interest rates.
And when interest rates rise, bond prices fall.
This left a roughly 17 billion gap
between what the bank paid for the bonds
and what their value was,
putting the bank in a bad position.
To get more cash and buy newer bonds,
Silicon Valley Bank had to sell some of their bonds
at a loss in the secondary market.
This helped trigger a run on the bank
and led to its collapse.
Now, this is an extreme example
of what can go wrong in the bond market.
- What happened to Silicon Valley Bank is not the norm.
Most people aren't forced to sell
billions of dollars of bonds at a big loss.
If you have to sell them early,
you probably won't see a big loss.
And you could even see a gain
if interest rates are falling.
- Ultimately, there are still no safer investments
than government bonds.
- Stock prices can go down like 4% in a day.
On a day-to-day basis,
you don't have that risk if you're buying and selling bonds
that you do have in the stock market.
- [Jordan] That's why they say.
- Nothing can touch them.
- [Jordan] Well, almost nothing.