The $30 trillion domestic stock market
seems to get all the attention. When the stock market sets new highs, we
instinctively feel things are good and getting better. When it tanks,
as happened in the initial months of the 2008 financial crisis, we think
things are going to hell.
But the
larger domestic debt market — at around $41 trillion for the bond market
alone — reveals more about our nation’s financial health. And right
now, the debt market is broadcasting a dangerous message:
Investors, desperate for debt instruments that pay high interest, have
been overpaying for riskier and riskier obligations. University
endowments, pension funds, mutual funds and hedge funds have been
pouring money into the bond market with little concern that bonds can be
every bit as dangerous to own as stocks.
Unlike buying a stock, which is a calculated gamble, buying a bond or a
loan is a contractual obligation: A borrower must repay a lender the
borrowed amount, plus interest as compensation. The upside in a bond is
limited to the contractual interest payments, but the downside is
theoretically protected. Bondholders expect to get their money back, as
long as the borrower doesn’t default or go bankrupt.
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