For private investors, understanding how the bond market works and why bonds matter is essential to promoting better long-term outcomes for our wealth journey.

Bonds are a cornerstone of investing and can unlock opportunities to diversify portfolios, manage risk and generate steady income. But there are important aspects of bonds to be aware of too.

This article explains what bonds are, how the bond market works and why it is relevant to private investors. 

What are bonds

Bonds are financial instruments issued by borrowers, typically governments or businesses to raise funds. 

When you buy a bond, you are lending your money to the borrower in exchange for regular percentage-based interest payments, known in the industry as a ‘coupon’ or a ‘yield’. The cash invested in the bond is returned when it reaches ‘maturity’. 

Bonds are often referred to as ‘fixed-income securities’ because they generate a predictable stream of interest payments over time.

There are several types of bonds, each with unique characteristics. Government bonds, such as U.S. Treasury bonds or UK ‘gilts’, are considered lower risk because they are backed by a government. 

Corporate bonds, issued by companies, carry higher risk but often offer higher yields too. There are categories within this too, such as ‘investment-grade’ and ‘high yield’. These tend to reflect the relative risk of the corporate bond in question. 

Understanding these distinctions can help investors choose bonds that align with their risk tolerance and financial goals.

Bonds have key features that influence their value. The yield determines the interest paid, while the maturity date indicates when the initial investment is repaid. Bonds also have a ‘face value’, which is the amount returned at maturity. 

Market conditions such as interest rates and economic trends affect bond prices, making it essential to understand how these factors interplay.

How the bond market works

The bond market, sometimes called the debt market or fixed-income market, is where bonds are issued, bought, and sold. It is one of the largest financial markets globally, with trillions of dollars in bonds traded daily. 

Unlike the stock market, which operates through centralised exchanges such as the London Stock Exchange, the bond market is primarily an ‘over the counter’ market. This means transactions occur directly between buyers and sellers, often aided by brokers or dealers.

The bond market has two main segments: the primary market and the secondary market. 

In the primary market, new bonds are issued and sold to investors. For example, a corporation may issue bonds to finance a new project and investors purchase them directly from the issuer. 

Once issued, bonds trade in the secondary market, where investors buy and sell existing bonds. 

The secondary market provides liquidity, allowing investors to adjust their portfolios as needed. Bond prices in the secondary market fluctuate based on supply and demand, interest rates, and the issuer’s creditworthiness. 

A key concept is the inverse relationship between bond prices and interest rates. When interest rates rise, existing bonds with lower coupon rates become less attractive, causing their prices to fall. Conversely, when interest rates decline, bond prices tend to rise. This dynamic affects the value of bond investments and influences investor decisions.

LISTEN: Mouthy Money podcast on why the Bank of England is cutting the base rate

The bond market is influenced by various participants, including governments, institutional (i.e. major financial businesses) and individual investors. 

Central banks, such as the Bank of England, play a significant role by setting monetary policies that impact interest rates. 

Credit rating agencies such as Moody’s and S&P Global Ratings, assess the creditworthiness of bond issuers, affecting investor confidence and bond pricing. Understanding these players helps investors navigate the complexities of the bond market.

Why the bond market matters to private investors

For private investors, the bond market offers several benefits that make it a valuable component of a diversified portfolio. 

Here are four reasons why bonds and the bond market are relevant to individual investors.

1. Income generation

Bonds provide a reliable source of income through regular yield payments. For retirees or investors seeking steady cash flow, bonds can supplement other income sources, such as dividends or state pension. 

By selecting bonds with varying maturities and yields, investors can create a predictable income stream tailored to their needs.

2. Risk diversification

Bonds typically have a low correlation with stocks, meaning their prices often move independently of equity markets. 

During periods of stock market volatility, bonds can act as a stabilizing force in a portfolio. Government bonds, in particular, are considered safe-haven assets, offering protection during economic downturns. By allocating a portion of their portfolio to bonds, investors can reduce overall risk.

It must be caveated however that this is not always the case. In the recent selloff in markets over US President Donald Trump’s tariff war – both stocks and government bonds witnessed major falls in value. 

3. Capital preservation

For investors nearing or in retirement, preserving capital is a priority. High-quality bonds, such as US treasuries, UK gilts or investment-grade corporate bonds, offer a relatively safe way to protect principal while earning a return. 

Although bonds carry risks, such as interest rate risk or credit risk, selecting bonds with strong credit ratings and appropriate maturities can minimise these concerns.

4. Flexibility and accessibility

The bond market provides a range of options to suit different investment goals. Investors can choose short-term or long-term bonds, high-yield or low-risk bonds and domestic or international bonds. 

Additionally, individual investors can access the bond market through bond mutual funds, exchange-traded funds (ETFs), or direct bond purchases. These vehicles make it easier to invest in bonds without requiring extensive expertise or large capital.

Key considerations for private investors

While the bond market offers opportunities, it also comes with challenges that private investors should understand. 

Interest rate risk is a primary concern, as rising rates can reduce the value of existing bonds. Inflation risk is another factor, as rising prices can erode the purchasing power of fixed coupon payments. 

Credit risk – the possibility of an issuer defaulting – is particularly relevant for corporate and lower-rated bonds.

To mitigate these risks, investors should conduct thorough research and consider their financial objectives. Diversifying across bond types, maturities, and issuers can reduce exposure to any single risk. Working with a financial planner or using diversified bond funds can simplify the process for those new to bond investing.

Another consideration is the impact of taxes. Interest from most bonds is taxable. Investors should evaluate their tax situation and consult a tax professional to optimise their bond investments, using tax wrappers such as pensions or ISAs which can lower the tax liability on your portfolio. 

The bond market is a cornerstone of investing, offering private investors opportunities to generate income, diversify portfolios and preserve capital. 

By understanding what bonds are, how the bond market operates, and why it matters, investors can make informed decisions to improve their financial plans. 

Disclaimer

This article is produced for general informational purposes only. It should not be construed as investment, legal, tax or other forms of financial advice.

If in any doubt about the themes expressed, consider consulting with a regulated financial professional for your own personal situation.

Past performance is no guarantee of future results. Investments can go down as well as up and you may get back less than you started with. 

Investments are speculative and can be affected by volatility. Never invest more than you can afford to lose.

For more information visit www.fca.org.uk/investsmart

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This was not a full Budget. Chancellor Rachel Reeves reiterated her commitment to one major fiscal event annually, but it included significant policy shifts affecting public finances, welfare, and defence. 

Rachel Reeves has ruled out tax rises for now, but a number of tweaks and buried items in the Government’s documents suggest more could be on the horizon.

Below is a detailed breakdown of the key points and their implications for UK households and taxpayers.

Rachel Reeves downbeat economy

The Office for Budget Responsibility (OBR) revised its 2025 GDP growth forecast from 2% to 1%, citing global trade tensions, including new 25% US tariffs on cars and parts, and a slower domestic recovery. 

Inflation is projected at 2.8% in 2025, with the Bank of England maintaining interest rates at 4.5%. Longer-term forecasts show slight improvement, with growth rising to 1.9% in 2026 and averaging 1.7-1.8% through 2029. 

The OBR estimates real household disposable income could increase by £500 annually by 2029-30, compared to the previous government’s final Budget, assuming tax thresholds are adjusted.

Public sector net borrowing is expected to fall from £112 billion in 2025-26 to £58 billion by 2029-30, reflecting tighter fiscal control. 

However, the OBR notes this trajectory leaves limited room for economic shocks, with debt peaking at 96.8% of GDP in 2027-28 before declining slightly.

Fiscal discipline 

Rachel Reeves adhered to her fiscal rules: balancing day-to-day spending with revenue and managing debt levels. 

Without adjustments, the budget would have faced a £4.1 billion deficit by 2027-28. Instead, measures secure a £6 billion surplus in 2027-28, rising to £9.9 billion by 2029-30. 

This ‘headroom’ is narrow, with the OBR warning it could vanish if growth falters further or external pressures mount.

Welfare cuts

Welfare spending faced significant reductions. From April 2026, new claimants of health-related Universal Credit will receive £50 weekly instead of £97, with payments frozen until 2030. Under-22s will be ineligible for this element. 

Existing claimants retain £97 weekly until 2030, though a severe conditions top-up is planned. 

The standard Universal Credit allowance will rise from £92 to £106 weekly by 2029-30, a £14 increase over five years. These changes are projected to reduce welfare spending by £3.2 billion annually by 2029-30. 

Analysis suggests three million households could lose £1,720 yearly on average, pushing 250,000 people, including 50,000 children, into relative poverty. 

Reeves allocated £1 billion for employment support, aiming to offset cuts by boosting workforce participation.

Rachel Reeves leaves taxes unchanged, for now

No new tax rises were announced, aligning with Reeves’ pledge to avoid mid-year hikes. 

However, measures from the Autumn Budget persist: employer National Insurance rises from 13.8% to 15% in April 2025, and personal tax thresholds remain frozen until 2028-29. 

This fiscal drag will increase the tax burden, with revenue projected at 37.7% of GDP by 2029-30, a post-war high. 

Late payment penalties for self-assessment tax will double to 10% from April 2026, raising an estimated £200 million annually.

In the follow up documents from the Government on the Spring Statement, the Government confirmed it was making rules around late filing of self assessment tax returns harsher, with bigger penalties for late filing.

It also announced that parents who face paying the High Income Child Benefit Charge will no longer have to file a self assessment but instead will be able to use a digital service that repays their child benefit through PAYE. 

Finally, the Government announced it is looking at reforms to the ISA allowance and whether it can be better used to promote private investors and UK growth.

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Household impact

For households, the Spring Statement offers little immediate relief. Mortgage holders face sustained pressure with interest rates at 4.5% and renters see no respite from rising costs as welfare support tightens. 

The £500 projected rise in disposable income by 2029-30 hinges on future growth and tax adjustments, offering a distant prospect rather than immediate help. 

Low-income families, particularly those on benefits, will feel the welfare cuts most acutely, with the Resolution Foundation estimating a 2% drop in real income for the poorest fifth of households by 2027.

The 2025 Spring Statement prioritises fiscal stability over bold intervention, trimming welfare and boosting defence while holding the tax line. 

For UK households, it’s a lean outlook. Slower growth, tighter benefits and no quick fixes. 

Reeves is betting on long-term discipline paying off, but with global risks looming, the margin for error is slim.

Photo courtesy of HM Treasury Flickr

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A Lifetime ISA or ‘LISA’ is a government-backed savings scheme designed to help UK residents save for their first home or retirement. Introduced in April 2017, the LISA provides a tax-free way to save with the added benefit of a government bonus. 

To open a LISA, you must be between 18 and 39 years old. You can save up to £4,000 each tax year until you turn 50. The UK government adds a 25% bonus to your contributions, up to a maximum of £1,000 per year. This means that if you save the full £4,000 annually, you will receive an additional £1,000 from the government, boosting your annual savings to £5,000. 

There are two types of LISAs: Cash LISA and Stocks & Shares LISA. A Cash LISA works like a traditional savings account, offering interest on your deposits. A Stocks & Shares LISA invests your money in the stock market, potentially offering higher returns but with greater risk. 

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You can withdraw funds from your Lifetime ISA without penalty under specific conditions: 

1. Buying Your First Home: You can use the savings, including the government bonus, to purchase your first home valued up to £450,000. The purchase must be made at least 12 months after your first contribution to the LISA. 

2. Retirement: Funds can be withdrawn without penalty after you turn 60. 

3. Special Circumstances: If you are terminally ill with less than 12 months to live, you can withdraw your money without penalty. 

For other types of withdrawals, a 25% charge is applied. This charge recovers the government bonus and applies an additional small penalty to your original savings, ensuring that early withdrawals are discouraged. 

The primary benefit of a LISA is the 25% government bonus, which significantly enhances your savings. Additionally, any interest, dividends, or capital gains earned within the LISA are tax-free. This can make a substantial difference over time, particularly if you start saving early. 

While the LISA offers attractive benefits, there are some considerations to keep in mind. The annual contribution limit of £4,000 may be restrictive for some savers. Also, the penalties for early withdrawal can be significant if you need access to your funds for reasons other than buying your first home or retiring. 

Photo credits: Pexels

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Mouthy Money Your Questions Answered panelist Laura Suter answers a reader’s question about finding the most tax-efficient home for their children’s savings.  

Question: What is the best way to save for your children’s future? We have £1,000 a month to save (for two children) and have been advised to put this into an active managed ISA that has fees of 1.87% in our name. Are there more tax-efficient saving vehicles? Would a passive investing approach be better? CR, North Shields

Answer: Firstly, congratulations on putting aside money for your children. It’s often a task on a parent’s to-do list that they never quite get around to. And having £1,000 spare each month for your two children is going to give them a great savings pot for their future life.

Let’s tackle the issue of the account type first.

You could save it in an account under your name, as the adviser has suggested, but this will use up some of your ISA allowance. 

Each adult has a £20,000 annual ISA allowance, so your children’s savings will take a £12,000 chunk out of that for one of you. If you have additional spare money each month that you want to save for yourself, this might prevent you from doing so within an ISA. 

In the worst case you could end up with savings outside an ISA that you then have to pay tax on, that you could have otherwise sheltered from tax in an ISA.

An alternative is to put it in ISAs under your children’s names, in a Junior ISA. Each child is entitled to one of these and you can put up to £9,000 a year into the accounts.

If you split the money between your two children, you’d be putting £6,000 a year into each of their accounts. 

Using a Junior ISA means the money is ringfenced for the child, so you can’t take it out until they turn 18. This has benefits, as you can’t be tempted to dip into it. But it also means you need to be sure that you won’t need it for anything else.

Your next question centres around the type of investment to pick. Your adviser has suggested an actively managed fund, while you suggest a passive approach might be more suitable. There’s no right answer to this, it comes down to preference. 

Put simply, a passive investment approach will cost you less but will only track the performance of the market – never outperform it. With active management you’re paying more to have a fund manager pick stocks for you, but the hope is that this will generate a higher return.

There’s no need to sit entirely in one camp, you could mix the two approaches. For example, having a broader UK stock market tracker and then using an active fund for a more specialist area, such as technology stocks or emerging markets.

Another option is to pick an all-in-one fund, which can be active or passive. These invest in a mixture of different assets and mean you only need to invest in one fund that is already diversified, rather than picking lots of different investments.

When investing for your children it’s important to keep the timeframe in mind. You don’t mention how old your children are, but if they are young you could have 15 or more years until they will access the money at age 18. 

This makes for a decent investment horizon and means you could potentially take more risk with the money, as you have time to ride out the ups and downs of the market. 

Of course, some parents would prefer to play it safe with their children’s savings – it’s down to personal preference and attitude to risk.

Laura Suter is head of personal finance at AJ Bell.

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management,and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.

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