The bond market is signaling trouble ahead. This is why you should pay attention

Bond markets have tumbled over economic concerns — even as stocks have hit record highs recently. Timothy A. Clary/AFP via Getty Images hide caption

If you know one thing about bonds, know this: A sharp sell-off is shaking the bond market, and it has big implications for both the economy and your pocketbook.

To understand why the sell-off matters, it helps to understand how bond markets work — and why they are sounding alarm bells about the U.S. government's record-shattering debt levels and the path for inflation.

Here's a simple and handy guide to make sense of what's going on.

Bonds are essentially like loans. The U.S. government — like just about any other government in the world — needs to borrow money to afford all its spending, including spending on federal employee salaries and Pentagon projects.

So to raise money, the U.S. government regularly sells bonds to a wide range of investors, from banks to other countries to individual people. (Companies also sell bonds; those are called corporate bonds.)

And just like banks charge you an interest rate when lending you money to use for a credit card or when offering you a mortgage, investors expect to be paid interest in exchange for lending their money to the U.S. government. In market talk, that interest rate paid by the government is called the bond yield.

Bonds can fluctuate in value, and that affects the amount of interest the government has to pay on that bond. It's a simple rule: Bond prices and yields move in opposite directions from each other.