If You Can’t Understand Bonds, You won’t Understand Money
The One Number That Controls Everything: Understanding Bond Yields
There’s one number that quietly decides how rich you’re likely to become. It doesn’t care about your hustle, your creativity, or your product. It is the foundation of how money moves through the world: The Bond Yield.
If you don’t understand bonds, you don’t really understand money.
Bonds Are the Baseline of the Financial System
A bond is simply a loan. You lend money to a government or company, they pay you interest, and they return your principal at the end.
U.S. Treasury Bonds are considered “risk-free” because of the government’s ability to repay. When the government offers 5% interest, that becomes the default benchmark for every other investment on Earth.
Every investor asks: “Why would I take a risk if I can earn 5% doing absolutely nothing?”
Bonds Set the Price of Money
Think of bonds like gravity for capital.
| When Yields are HIGH | When Yields are LOW |
|---|---|
| Saving becomes attractive | Cash feels useless sitting still |
| Borrowing is expensive | Borrowing is cheap |
| Risk-taking slows down | Investors take more risk |
| Money “sticks to the ground” | Money starts moving |
How Interest Rates Crush “Wants”
When rates rise, mortgages, credit cards, and business loans cost more. This leaves people with less “extra” money.
- Industries that struggle: Luxury, fashion, beauty, and lifestyle.
- The Shift: People don’t stop spending; they choose function over indulgence.
Even Essential Businesses Feel It
Take HVAC as an example. Heating is a necessity, but large systems are often financed.
- High Rates: Monthly payments go up $\rightarrow$ fewer people qualify $\rightarrow$ big projects are postponed.
- The Result: Customers choose smaller, cheaper repairs over full replacements.
How to Win When Money Gets Tight
When money is scarce, the winners are the businesses that protect assets, not the ones that push people to replace them.
- Sell Protection, Not Indulgence: Help customers avoid future costs.
- Offer Smaller Decisions: A repair or tune-up is an “easy yes” compared to a full system replacement.
Using Bonds as an Investment Filter
Imagine a business deal with a 10% projected return.
- If bonds pay 1%: The deal looks amazing.
- If bonds pay 5%: Is doubling that return worth the stress, risk, and 40-hour work week?
The answer is often no. The bond market acts as a filter to keep you from chasing “exciting” deals that don’t make financial sense.
Profit vs. Cash: The Growth Trap
Profit can hide cash starvation. If you make $300,000 in profit but need $500,000 in new inventory to grow, you are actually getting “poorer” in the short term.
The Rule: Neither profit nor cash matters unless the return beats what bonds pay with zero effort.
The Four Rules for Beating Bonds
To build lasting wealth, your investment must pass these four filters:
1. Defensibility
You need a “moat”—a brand, reputation, or proprietary process. If it’s easy to copy, you can’t justify high returns.
2. Pricing Power
Can you raise prices without losing customers? Being essential is more durable than being “nice to have.”
3. Low Capital Requirements
The best businesses leverage knowledge or systems. If every dollar of growth requires a dollar of hardware/inventory, you won’t outrun bonds.
4. Disciplined Use of Cash
Wealthy operators obsess over what gets reinvested, protected, or cut. Every dollar needs a purpose.
Final Thought: Systems vs. Labor
Software scales because costs don’t change whether you have 10 or 10,000 customers. You can apply this to any business by:
- Turning processes into franchises.
- Packaging expertise into products.
- Selling systems instead of hours.
The Real Goal: Don’t just be profitable. Beat risk-free money. If you aren’t earning significantly more than the bond yield, you are taking a risk for no reward.