The Strategic Bond Investor, Third Edition Strategic Tools to Unlock the Power of the Bond Market Anthony Crescenzi, Manny Roman

The Strategic Bond Investor, Third Edition Strategic Tools to Unlock the Power of the Bond Market Anthony Crescenzi, Manny Roman

1
THE IMPORTANCE OF THE
BOND MARKET
I opened the first edition of The Strategic Bond Investor in 2002 by saying,
“The bond market affects you more than you probably know.” I had
witnessed both in my professional career and at home the bond market’s
enormous influence on global economic activity, national standards of
living, asset prices in public and private markets, and the political landscape
—and people personally. This notion became profoundly more compelling
in 2008 following an epic collapse in the financial markets rooted in the
bond market. Most people now understand that the bond market was the
main instrument by which credit use became excessive, enabling bubbles to
form in many assets, both financial and in the real economy, chiefly in the
US housing market, before bursting in historic fashion. The availability of
credit made possible by the bond market enabled borrowers from all ends of
the credit spectrum to finance investments and consumption that ultimately
proved to be unsustainable relative to income trends. Few were spared from
the carnage, with widespread and long-lasting damage inflicted on the
household, corporate, and government sectors.
Echoes of the crisis remain. Economic growth has downshifted to a “new
normal,” with credit far more difficult to access than it once was, and
nations facing other challenges, most notably aging populations and a
dearth of productivity-enhancing investments tied to a global savings glut in
the private sector as well as inaction by national governments. These
fragilities leave economies and markets inherently vulnerable to any form
of stress, as was so glaringly apparent in early 2020 when global markets
plunged in response to the outbreak of the coronavirus. The new normal
means that the many factors that have impaired economic growth for more
than a decade are likely to continue to prove to be more structural than
cyclical, resulting in lasting repercussions for the global economy as a
whole and the financial markets in particular.
At a minimum, given the unmistakable impact that events in the bond
market have had on the world before and the financial crisis, it behooves
everyone to gain a better understanding of the bond market even if one is
not a bond investor.
In many ways the bond market profoundly affects nearly everyone. The
2008 financial crisis illustrated this very clearly, with the bond market’s
influence stretching well beyond conventional wisdom in ways that most
people were previously unaware of. The same could be said for the crisis
aftermath, when central banks used the bond market as their instrument to
restore the functioning of the financial markets and revive economic
growth. In short, the bond market, where interest rates are set and where
credit is formed, is little understood yet immensely important to our living
standards.
Throughout this book I will highlight the many ways in which the bond
market affects the global economy, its financial markets, and most
importantly people’s lives. I am convinced that when you have finished
reading it, you will be surprised and enlightened, and you will look at the
bond market in a new light. I will show you how you can unlock the power
of the bond market either by investing in bonds or by gaining a greater
understanding of how the bond market’s behavior could be impacting your
life in one way or another, chiefly through its impact on economies and
markets. At the same time you will gain valuable insights into how the bond
market operates, the role that it will play in the new normal—for both
investors and borrowers—and how it will influence China’s integration into
the world financial system, furthering the seismic shift in economic power
from the United States to China. We will discuss this in Chapter 7.
You will learn important insights that are absent in other books about the
bond market. More often than not, those books are filled with information
that is of little personal relevance to the reader—information that is
important but often overly technical and frankly uninteresting.
Of course, for readers of bond books to have the tools to become
successful bond investors, some technical content must be included in any
book about bonds, and there will be plenty here to please both the novice

The Strategic Bond Investor, Third Edition Strategic Tools to Unlock the Power of the Bond Market Anthony Crescenzi, Manny Roman