Perceived as less glamorous than stocks, the bond market is fundamentally more important. It dictates the "price of money" and has historically been the true engine of national power and economic stability, a fact often lost on the general public.
Venice created the first tradable government debt to fund a war against Constantinople. The war failed, but the forced loan became permanent. This accidental innovation created a new asset class that lubricated finance and became a pillar of the Venetian economy.
While debt existed for millennia, the Venetian innovation of making loan receipts tradable was the crucial unlock. This created a liquid marketplace and dispersed ownership, transforming a simple loan into a powerful financial tool that could flow through time and across citizens.
While military leaders like Nelson get the credit, Britain's victory was largely financed by its sophisticated bond market. The ability to fund itself almost infinitely at a low 3% interest rate allowed it to sustain a long war and subsidize allies, an advantage Napoleon's France lacked.
In the 19th century, Gregor McGregor fabricated a country in Central America called Poirier. He successfully sold bonds in London to fund its development and enticed hundreds of settlers to emigrate, most of whom died. This highlights the speculative mania and potential for fraud in nascent markets.
Contrary to fears that a liquid ETF wrapper around illiquid bonds would create a dangerous mismatch, fixed-income ETFs have become a flywheel, accelerating the modernization of bond trading and making the underlying credit markets more liquid, not less.
When Liz Truss's government announced massive unfunded tax cuts in 2022, the UK government bond (gilt) market revolted. The ensuing crisis, amplified by leveraged pension strategies, demonstrated the bond market's power to discipline even major world economies, leading directly to her resignation.
Illustrating duration risk, Austria's century bond lost over 80% of its value when rates rose. In contrast, Argentina's century bond, which defaulted after three years, had such a high coupon that investors who received initial payments actually lost less money.
Government bond markets, traditionally seen as safe havens, have become more volatile. This is driven by hedge funds using immense leverage (up to 100x) via the repo market to trade small discrepancies between bonds and futures, making the system less stable.
The private credit boom has led to lax standards and inevitable future losses. However, it's not a systemic threat like 2008. By moving lending from leveraged banks to locked-up funds, the model is inherently safer for the broader financial system, even if individual investors get burned.