Bonds are debt securities that are offered by banks, financial institutions and government agencies. Bonds are set for a specific period of time, often referred to as the maturity date and offer the promise of a rate of return (coupon rate). Bonds have been a financial instrument used in the market for hundreds of years as an alternative to obtaining a traditional loan. The major difference between offering stock versus bonds for a company or entity is that stock provides a level of ownership in the offering party, in contrast, bonds are considered to be a creditor.

One of the largest issuers of bonds is the Federal Government, through the Treasury department. Government bonds are often thought to be amongst the most secure investments, as the strength of the entire government stands behind the bond offering. Treasury bonds were popularized during World War One as a way to help the government finance the costs of the war. Treasury bonds are likely to be the bond that gathers most of the attention in the media, as it is often the finance vehicle of choice for the government to issue new debt to help finance its fiscal operations. Treasury bonds and their yields change on a daily basis and are influenced by economic events, such as GDP, Unemployment, CPI and the supply/demand created from investors who look to trade in and out of more secure debt instruments. The major risk investors who purchase bonds face is inflationary risk. When you purchase a bond, you receive a guaranteed rate of return on your investment if you hold the loan for the entire term. Inflationary pressure, requires investors to seek higher rates of returns on there bonds, to help ensure they meet their financial objectives at the end of the bond maturity terms.

Interest rates can be directly impacted by the bond market. Mortgage interest rates, are a direct reflection of the supply/demand of mortgage bonds, or mortgage backed loan securities in the secondary market. The most common marketplace for mortgage backed securities arises from the packaging of mortgages (mortgage backed securities), which are serviced through Fannie Mae or Freddie Mac and are then sold as mortgage bonds into the secondary marketplace. The demand for these mortgage bonds, directly reflects how mortgage bonds are priced in the market place. Most common investors, look at the yield offered on ten year treasury bonds, as this often moves closely to the yield of mortgage backed loan securities, therefore when the yield on treasury bonds increase, most likely yields on mortgage backed bonds will also be moving higher, forcing long term mortgage rates to move higher. The major difference between a mortgage bond and a treasury bond, is the potential for default. Because mortgage bonds are pooled, they help to offset the risk of an individual homeowner going into default. Pools of mortgages are often classified by their risk, and higher risk pools, offering higher yields to investors, but also carry the risk of a larger percentage of default mortgages.

If you are considering investing in mortgage bonds (MBS) or treasury bonds, you should consult with a financial advisor or consultant to explore the risks and options