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What is a bond? And we aren’t talking the 007 variety…
Amy Woolliscroft13th January 2026
While many financial terms including ISA, pension and mortgages are well known, if someone asked you what a bond was, would you know the answer?
Globally, the bond market is worth hundreds of trillions of dollars every year. They can help investors generate income while adding a layer of diversification to their portfolios. When these bonds come from well-established economies, they’re typically considered lower risk, providing a steady income stream and assurance of the repayment of your initial investment.
This can make them a useful addition to any portfolio, and yet to many investors, bonds remain a bit of a mystery. So, at a headline level…
· You may have heard about bonds in the news lately as what happens in the bond markets impacts your finances at home – mortgages, loans and savings rates
· Bonds are fairly simple products, they are effectively an ‘IOU’ and can offer both income and diversification to your portfolio as an investor
· Bonds are different to shares and can help to smooth out a portfolio’s long-term performance
· They are issued by the government to raise funds to spend on defence, public services, state pensions and welfare. They are also used by companies to fund expansion
What are bonds?
Bonds are essentially loans, like a friendly ‘IOU’. When the government’s tax revenue falls short of covering its annual expenses, it often turns to issuing government bonds, also called ‘sovereign’ bonds. In the UK, we refer to these as gilts.
Financial institutions, like pension funds and insurance companies, are typically the ones snapping up these bonds, and governments might even buy bonds from one another. Many bonds are held on to until they mature, but some find their way into the secondary market, where they can be traded similarly to stocks.
When you purchase a bond, you're lending money to the issuer for a set period, and in return, you generally receive regular interest payments, known as the ‘coupon.’ Once the bond reaches its maturity date, you’ll get back the original amount you invested, known as the ‘principal.’
The relationship between bond pricing and bond yields
Bonds’ price and yield are inversely related. When investors drive the price up, the yield drops, and when the price falls, the yield goes up. To put it simply, a bond yield tells you what you earn by holding onto that bond. This is useful because it allows you to compare different bonds and see how they stack up against each other.
On the flip side, the bond price informs you about how much you’ll need to spend to buy it.
When considering whether to invest in a particular bond, it’s important to think about several factors: the interest rate it offers, how long it will be available (the term), and how it compares in price to similar bonds.
Why buy a bond?
High-quality sovereign bonds can be a great way to balance your investment strategy, as they are generally seen as less risky than stocks. One of the main reasons is that fixed repayment dates for both interest and principal (the original investment) provide a sense of security.
If you're focused on creating a diversified portfolio that aims to help maximise returns without taking on too much risk, setting aside a portion for bonds could be a smart move.
The risks
Inflation is not best friends with bonds. It reduces the real value of fixed-rate bonds because it erodes the purchasing power of future interest payments. Longer-term bonds are more vulnerable to this due to a longer period of exposure to rising prices.
Sovereign bond defaults (as in Argentina, Ghana, Sri Lanka) can lead to debt restructuring, which may protect bondholders but generally reduces the attractiveness of the issuing country’s bonds as investments.
Bonds are a valuable diversification tool because they usually have a low or inverse (i.e. opposite) relationship with shares, which helps smooth your investment returns over time. However, this relationship is not guaranteed and can be exposed to worldwide events – in 2022 the S&P 500 and 10-year Treasury benchmark both ended the year in negative territory when Russia invaded Ukraine.
Our directors, Emma Wilcock, Richard Jones and Joe Moricca have experienced the bond market through many different world and domestic events. We understand the importance of remembering your long-term financial goals and work closely with you to ensure that we consider all financial products to keep your priorities on-track. Bonds may or not be appropriate for your objectives, but we can work that out together.
If you’d like to book an appointment, please call 01832 279170 or fill in our contact form here.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
SJP Approved 13/1/2026