The potential bond crisis most people have never heard of

"The name's Bond," goes the famous line.But in this case, it's notJames Bond. While nearly everyone knowsevery detail aboutthe 007 superspy, his lesser-known financial namesake is manytimes more important.

The James Bond franchise is expected to continuestrongly with the autumn arrival ofDaniel Craig speeding through the streets of Rome in SPECTRE, but those in the financialknow worry about the spectre ofthe other kind ofbond heading for a crash.

Four out of five bond traders worry the market could collapse in a disorderly sell-off.

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And while Bond villains jump right out at you,bond villains are hard to finger.

At theirmost basiclevel, bonds are anything but complicated. They are simply a legalarrangement where one person agrees to lend money to someone elsefor a fixed length of timeat a fixed rate of interest.

Popping the bond bubble

In the public imagination, if we thinkof them at all, bonds are the epitome of safety.Which is why it is strange to read in one of the world's most reliable business publications, the LondonFinancialTimes, that experts are terrified of an imminentcrash in bonds that could destabilize the global economy.

"This market could pop," leading bond trader Brad Crombie told theFT. "There is more tension and anxiety over valuations than for a long while."

In the financial world, bonds are called "fixed income" investments. That's different from stocks. When companies need money, sometimes they sell pieces (or shares) of themselves that go up and downwith the perceived value of the company. Those are stocks.

Unlike stocks,bonds represent a long-term loan to the company's shareholders. Bondholders don't earn any more when a company does well. But if the company gets into trouble, bondholders get their money backbefore shareholders get a penny. Thus theirreputation for safety.

But of course there is no investment so safe that financial marketscan't bring out the risk.

Volatile and very big

There are severalreasons why bond markets are frightening. One is their size. The Bank for International Settlements has pegged global outstanding debt in bonds in the range of one hundred trillion dollars, one of those numbers so huge it is almost meaningless to our daily lives.

The other is that for all their safety and stability, the market where people tradebonds has becomehugely volatile, something that needs a little explanation to someone not familiar with that market.

A single factmakesbond trading confusing: the value of bondsmoves in the opposite directionto interest rates.

But even thatis simple once you get your head around it.

Let's say afew years ago you offered to lend a company (or the Canadian government) $1,000 in the form of a30-year bondat, say, seven per cent interest. You don't have to keep if for 30 years.

If you sold it on the bond market this spring when interest rates were only twoper cent, the earnings on your seven per centbond are more than three times what bonds are earning now, so your bondwould sell formuch more than the $1,000you paid for it.

On the other hand, if you bought abond this spring when rates weretwo per cent and then sell it in a few years when interest rates arefourper cent, your $1,000 bond would only be worth about $500.

The detail is more complex of course.But the principle is plain. Falling interest rates make existing bonds worth more. Rising rates make existing bonds worth less.

Not so safe

Over the last several decades, steadily declining interest rates have made buying bonds very lucrative and very safe. But when interest rates switch direction and begin to climb once again, bonds purchased as a safe haven no longer seem so secure.

Throwing an extra screw in the works these days is the fact that the biggest buyersof government bonds have been governments themselves, and as they stop there may be more bonds than buyers.Fears of the domino effect of a Greek default have only added to the latest concerns.

To some traders, an unnecessary rise in interest rates is the villain of the piece. To others, the fault lies with derivative traders hoping to make short-term gains on what should be a long-term investment. If the bubble argument is right, it is just a matter of buyers getting greedy and irrationally exuberant, forgetting that rates can rise as well as fall.

When he announces the Canadian key lending rate this week,Bank of Canada governor Stephen Polozmay be worried about the impact of higher rates on the housingmarket and recordconsumer debt. Other central bankersincluding the U.S. Federal Reserve'sJanet Yellen must also take the global bond market into theircalculations.

Because when it comes to pension funds and other large investments, the bond market may have a licence to killthe full value investors have been expecting.

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More analysisby Don Pittis