Reference

Glossary.

The terms that run through everything here, defined once and properly. Each entry stands on its own — what it means, why it matters, and where it is usually misread.

By theme

Rates & yields

What a bond pays, and how sensitive that payment is to time.

Monetary policy

The institutions that set the price of money, and the tools they use.

Credit & funding

Who lends to whom, at what premium, and what happens at rollover.

Cycle & prices

The measures that describe whether an economy is expanding or shrinking.

Markets & trade

How prices move, and the frictions that move them.

A–Z

B

Balance sheet also: central bank balance sheet, quantitative easing, QE, quantitative tightening: A central bank's balance sheet is the list of assets it holds and the money it created to acquire them. When it buys bonds, it pays with newly created reserves and the balance sheet expands; when it lets holdings mature without replacing them, reserves drain and the balance sheet shrinks. Expanding it is what quantitative easing means; shrinking it is quantitative tightening.
Bond also: Treasury, government bond, fixed income: A bond is a loan in tradable form: the issuer takes money now and commits to a fixed schedule of payments until the principal is returned. Because those payments are fixed, the only thing that can adjust to changing conditions is the price, which is why a bond loses market value when the return investors demand goes up. Government bonds — Treasuries in the United States — are the largest and most heavily traded category.

C

Central bank also: monetary authority: A central bank is the institution that issues a currency and sets the terms on which the banking system can obtain it. Its main levers are the policy rate, the reserves it supplies or withdraws, and the conditions under which it lends to banks. It does not decide prices, wages or output — it changes the cost and availability of money, and everything else follows indirectly, with a lag.

D

Duration also: interest-rate duration, modified duration: Duration measures how sharply a bond's price reacts to a change in yields, expressed as a number of years. A bond with a duration of seven loses roughly seven percent of its value if yields rise by one percentage point, and gains about as much if they fall. It is a sensitivity, not a date — related to how long the money is tied up, but not the same as maturity.

F

Federal Reserve also: Fed, FOMC: The Federal Reserve is the central bank of the United States, and the institution whose decisions set the price of dollar funding worldwide. Its rate-setting body, the Federal Open Market Committee, meets on a published schedule to set a target range for the overnight rate at which banks lend reserves to each other. Congress gives it a dual mandate — stable prices and maximum employment — which is unusual; most central banks are charged with price stability alone.

I

Inflation also: CPI, core inflation, consumer price index: Inflation is the rate at which the general price level rises over a period, usually reported as the change in a basket of consumer prices against the same month a year earlier. It measures a rate of change, not a level: falling inflation means prices are still rising, only more slowly. Prices returning to where they were requires deflation, which is a different and rarer event.

L

Liquidity also: funding liquidity, market liquidity: Liquidity describes how easily money moves — either how much central-bank money and credit is available to the financial system, or how easily an asset can be sold without moving its own price. The two meanings are connected but not identical, and the same word is routinely used for both. When commentary says liquidity is tightening, it almost always means the first: funding is becoming scarcer relative to the demand for it.

P

Productivity also: output per hour, labour productivity: Productivity is output divided by the input used to produce it, most commonly measured as output per hour worked. It is the only source of sustained real income growth: an economy can produce more by working longer or adding workers, but raising what an hour of work is worth is what makes higher wages affordable without higher prices. Because it is a ratio, it can rise for two very different reasons — more output, or less input.
Purchasing power also: real value, real terms: Purchasing power is what a sum of money actually buys, as distinct from the number printed on it. It falls when prices rise faster than the sum does, which means a salary, a pension or a bank balance can be unchanged in figures and smaller in substance. Converting nominal amounts into purchasing power is what economists mean by measuring something in real terms.

R

Recession also: downturn, contraction: A recession is a broad, sustained decline in economic activity across an economy, not confined to a single sector. The shorthand definition — two consecutive quarters of falling output — is a rule of thumb rather than a standard; in the United States the dating is done by a committee that weighs employment, income, production and spending together. Because that judgement takes time, a recession is normally identified well after it began.
Refinancing also: rollover, rollover risk: Refinancing is replacing maturing debt with new debt rather than repaying it. Most large borrowers — governments, banks, corporations — never retire their debt in full; they roll it forward continuously, which means they return to the market repeatedly and accept whatever terms prevail at that moment. The risk is not that the borrower is unwilling to pay but that the new terms are worse than the old ones, or that no lender is available at any price.

S

Supply chain also: supply network, sourcing: A supply chain is the sequence of suppliers, processing steps and transport links through which a finished product is assembled from raw inputs. The word suggests a line, but the structure is a network with shared nodes: many apparently unrelated products depend on the same refinery, port or single specialised supplier. Those shared nodes are where a local disruption becomes a general one.

T

Tariff also: import duty, customs duty: A tariff is a tax a government charges on imported goods, collected at the border from the importing company rather than from the foreign exporter. Who ultimately bears the cost is a separate question from who writes the cheque: it is divided between the exporter, the importer and the final buyer according to how easily each can avoid it. It is a tax on a transaction, and like any tax its burden lands where there is least room to move.

V

Volatility also: realised volatility, implied volatility, VIX: Volatility measures how much a price moves around, not which direction it moves in. Realised volatility describes the size of past movements; implied volatility is what option prices reveal about the movement market participants expect ahead. Both are quantities of movement, so a market can be highly volatile while going nowhere, and can rise steadily with almost none.

Y

Yield also: bond yield, yield to maturity: A bond's yield is the annual return an investor earns by buying it at today's price and holding it to maturity. It is calculated from the price rather than set by the issuer, which means price and yield always move in opposite directions: the same fixed payments bought more cheaply produce a higher return. When yields are described as rising, bond prices are falling.