Full transcript
Recession fears have caused investors to flee to safe investments
0:00- [Jordan] These are government bonds.
0:01(transition thudding)
0:02Even if you know nothing about them, you might have heard.
0:05- Treasuries have proven always to be a reliable,
0:08safe haven investment.
0:09- Recession fears have caused investors
0:11to flee to safe investments like Treasury Bonds.
0:13- U.S. Treasury Bonds are a pretty safe investment.
0:17- Nothing can touch them
0:18- [Jordan] But there's a caveat.
0:20Not all bonds are the same.
0:22Some let you take a bit of a gamble by selling them.
0:26And if you do, like Silicon Valley Bank had to,
0:29you introduce the one thing
0:31that everyone says bonds don't have, risk.
0:36We break down how the fail safe investment can fail.
0:40And why despite that, bonds are still so safe.
0:44(gentle music)
Savings bonds, the primary market and government defaults
0:47(upbeat music)
0:48Bonds are IOUs.
0:50- The government gets a lot of money from taxes
0:52but it spends more money.
0:54So it has to borrow money.
0:57- [Jordan] And that's where bonds
0:58aka Treasury securities come in.
1:01You give the government money
1:03and it promises to give it back at a later date
1:05with some interest.
1:07And the government takes this promise very seriously.
1:11This makes bonds an ideal investment if safety,
1:14rather than a large return, is an investor's top priority.
1:18Bonds tend to be a popular investment tool for retirees,
1:22investors looking to add some cushion to their portfolio,
1:25or parents looking to start their kids' college fund.
1:29And the bond market, as we know it today,
1:31can be traced all the way back to the First World War.
1:34(tape whirring)
1:35- [Narrator] From a pistol shot at Sarajevo,
1:38the first the great modern world wars explode.
1:41- [Jordan] In 1917,
1:42the U.S. government released Liberty Loans,
1:45a type of bond meant to garner public support
1:48and funds for the war.
1:50People could cash them in typically 10 to 30 years later.
1:54Ultimately, Liberty Bonds raised more than $17 billion.
1:59That's 2/3 of the funds America raised
2:01for the First World War.
2:03It marked the birth of the modern Treasury market
2:06and introduced investing to many Americans.
2:09♪ We've got another bond to buy. ♪
2:13- The government issued more war bonds during World War II.
2:16After the war, they were converted to savings bonds.
2:19- [Narrator] It's your future.
2:21Build for it, save for it.
2:23Buy shares in it.
2:24- [Jordan] We still have savings bonds today.
2:27Like war bonds,
2:28they can only be bought directly from the government,
2:31and you can't sell them.
2:32Though, you can transfer them to people as gifts.
2:36- (indistinct) gift, Merry Christmas.
2:39- Thank you.
2:39- [Jordan] The only thing that could prevent you
2:41from getting your money when your savings bonds mature
2:44is if the Treasury defaulted.
2:47Okay, it wouldn't look like that,
2:49but the government defaulting on its debts
2:51would be catastrophic.
2:53However, it's incredibly unlikely to happen.
2:56- The fact that everybody thinks
2:58that treasuries are safe helps make them safe.
3:01Investors around the world just pile into treasuries.
3:04That makes it very, very easy
3:06for the U.S. government to raise more money
3:09in the bond market.
3:11- [Jordan] This perpetuates a cycle.
3:13People buy bonds from the government.
3:15The government spends the money.
3:17It issues new bonds.
3:19And then it uses some of the new bond money
3:21to pay everyone back.
3:23Plus.
3:24- The US government can always raise taxes
3:26or cut spending in order to pay back its bond holders.
3:30- [Jordan] So the way to introduce risk to bonds
3:32really comes from, well, you.
Other government bonds, the secondary market and selling at a loss
3:36Not all bonds function like savings bonds.
3:39Take these securities, Treasury Bills, Notes, and Bonds
3:44you can buy in the primary market,
3:46meaning you get them new in a government auction.
3:49Or the secondary market,
3:51meaning you buy them from another seller.
3:54And unlike savings bonds, you can sell these bonds
3:56to someone else in the secondary market before they mature.
4:00But if you do, you introduce risk.
4:03So why take a perfectly safe investment
4:06and make it less safe?
4:08- The benefit of the secondary market
4:09is that if you need the money, you can always sell the bond.
4:13And you don't have to wait 10 years until the bond matures.
4:17- [Jordan] But if you sell a bond,
4:19you're not guaranteed to get the face value you paid for it.
4:22That's because a bond's value in this market
4:25is always changing.
4:27In that way,
4:28the bond market looks a bit like the stock market.
4:31To understand how this risk works in the real world,
4:34let's look at Silicon Valley Bank
4:36- Silicon Valley Bank was getting a lot of money in
4:39from the tech sector,
4:41and it needed a place to put that money.
4:44- [Jordan] So it bought billions of dollars
4:46of medium to longer term notes and bonds
4:48for the same reason anyone buys them,
4:51they're a safe place to park money for a while.
4:54However, at the time the bank bought these bonds,
4:57the interest rate on the bonds was low.
4:59If the bank had been able to hold its bonds to maturity,
5:03then the interest rate wouldn't have mattered.
5:05The bank would've cashed in their billions, plus interest,
5:08and that would've been that.
5:10Instead, a few things went wrong.
5:13to ease rising inflation,
5:15the Treasury increased interest rates.
5:17And when interest rates rise, bond prices fall.
5:21This left a roughly 17 billion gap
5:23between what the bank paid for the bonds
5:26and what their value was,
5:27putting the bank in a bad position.
5:30To get more cash and buy newer bonds,
5:32Silicon Valley Bank had to sell some of their bonds
5:35at a loss in the secondary market.
5:37This helped trigger a run on the bank
5:40and led to its collapse.
5:42Now, this is an extreme example
5:44of what can go wrong in the bond market.
5:47- What happened to Silicon Valley Bank is not the norm.
5:49Most people aren't forced to sell
5:52billions of dollars of bonds at a big loss.
5:56If you have to sell them early,
5:58you probably won't see a big loss.
6:00And you could even see a gain
6:02if interest rates are falling.
6:04- Ultimately, there are still no safer investments
6:07than government bonds.
6:08- Stock prices can go down like 4% in a day.
6:11On a day-to-day basis,
6:13you don't have that risk if you're buying and selling bonds
6:16that you do have in the stock market.
6:18- [Jordan] That's why they say.
6:19- Nothing can touch them.
6:21- [Jordan] Well, almost nothing.