”The bond market is the most important market in the world. It is the backbone of all other markets.” – Ray Dalio, founder, Bridgewater.

A recent Financial Time piece on bonds [link] reminded us of their long, proud history as well as their critical importance to the proper functioning of today’s global markets. The article points out that while banks have faded in importance as holders of capital, bonds – led by US Treasurys – are major components of the world’s financial system.

Size-wise, the total bond market at $133 trillion (per BIS) is smaller than the $181 trillion global banks represent, according to the Financial Stability Board. But as part of the “shadow banking” system, it is having an impact on how policy makers view regulation.

Ironically, the failure of Silicon Valley Bank put a spotlight on the relationship between the bond market and the banking system. Fixed rate instruments, even mortgage debt, in themselves aren’t necessarily risky beyond their fundamentals. But in the context of a bank asset/liability mismatch amid rising rates where cash deposits are fleeting, they can be problematic.