There should not quite a lot of memorable quotations about bond markets, however certainly one of my private favorites is from James Carville, the chief political strategist for President Clinton, who nonetheless reveals up as a speaking head doing information commentary now and again. Early in Clinton’s presidency, a specific focus was decreasing funds deficits, with the idea {that a} decrease path for future authorities borrowing would make US Treasury debt appear safer to buyers–and thus result in decrease long-term rates of interest that will stimulate the financial system. For instance, David Wessel and Thomas T. Vogel described the dynamic in an article for the Wall Road Journal on February 25, 1993, “Arcane World of Bonds is Guide and Beacon to a Populist President.”
The Clinton funds proposals, together with the financial “dot-com boom” of the Nineties, triggered the federal funds to transfer from a deficit of about 4% of GDP when Clinton took workplace in 1993 to funds surpluses over 4 years from 1998 to 2001. However in early 1993, the funds laws was nonetheless taking form, and Clinton was being briefed available on the market for federal bonds virtually each morning. Within the WSJ article, Wessel and Vogel quote Carville: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”
Certainly, after President Trump introduced his “Liberation Day” bundle of tariffs again on April 2, opposed response from the bond markets for US Treasury debt (together with US inventory markets) pushed again, inflicting Trump to start out declaring a collection of pauses and suspensions within the tariff timelines which have continued on. Furthermore, Trump’s proposed federal funds technique is the other of Clinton’s: that’s, Clinton moved towards a balanced funds with the objective that it could additionally result in diminished long-term rates of interest, whereas Trump’s proposed tax cuts transfer away from a balanced funds, and he as a substitute appears to be counting on criticizing the Federal Reserve as a means of making an attempt to scale back rates of interest.
For a primer on US bond markets, the Spring 2025 Journal of Financial Views (the place I work as Managing Editor) features a symposium on the topic. As Nina Boyarchenko and Or Shachar observe within the opening paper: “US fixed income markets are among the largest in the world, with $28.3 trillion in US Treasuries, $11.2 trillion in US corporate bonds, $4.2 trillion in municipal bonds, and $2 trillion in agency debt outstanding at the end of 2024.” (“Agency debt” refers to debt issued by a government-sponsored enterprise. These businesses are sometimes (however not completely) associated to borrowing cash that buys residence mortgage debt and turns it into monetary securities, just like the Federal Nationwide Mortgage Affiliation, typically referred to as Fannie Mae, and the Federal Dwelling Mortgage Mortgage Company, typically referred to as Freddie Mac.) For comparability, the US GDP this 12 months will likely be about $28 trillion.
Once we discuss bond markets “intimidating” politicians, what we are literally speaking about is how bondholders view the riskiness of these bonds. However who’re the bondholders? Boyarchenko and Shachar provide a helpful determine, exhibiting who’s prone to maintain every class of bonds. They write:
Panel A focuses on US Treasuries. For the reason that Seventies, international buyers have performed an more and more dominant position, with their share rising sharply within the late Nineties and early 2000s. Their holdings peaked round 2009 earlier than step by step declining to early 2000s ranges by the tip of 2024. Different vital holders embrace pension funds and mutual funds, although their shares have remained comparatively secure over time. Panel B examines company bonds, the place insurance coverage corporations have traditionally been the most important holders. Nevertheless, their share has steadily declined, whereas mutual funds and international buyers have gained prominence, reflecting broader shifts in funding preferences. Panel C presents the foremost holders of mortgage securities backed by government-sponsored enterprises. Family holdings have been extra vital within the earlier many years, however over time, international buyers, mutual funds, and pension funds have elevated their presence on this market. Panel D reveals the holders of municipal bonds. Households have constantly been the dominant buyers, though mutual funds have gained market share over time. Unsurprisingly, not like the opposite securities classes, international buyers play a minimal position on this market. That is largely as a result of tax benefits that municipal bonds provide to US buyers, because the curiosity earnings is usually exempt from federal taxes, and in lots of circumstances, state and native taxes. As a result of international buyers don’t profit from these tax exemptions, they’ve much less incentive to carry municipal bonds in comparison with home buyers. Taken collectively, the determine highlights the altering panorama of mounted earnings possession, emphasizing how totally different investor teams have adjusted to financial developments and market occasions over time.
Boyarchenko and Shachar go into extra element on how the Federal Reserve interacts with bond market in its conduct of financial coverage. The opposite papers within the JEP symposium take separate appears at US Treasury debt, US company bonds, and the US municipal bond market. All papers in JEP are freely out there, compliments of the writer, the American Financial Affiliation. The 4 papers within the bond markets symposium are:
