There are not a lot of memorable quotations about bond markets, but one of my personal favorites is from James Carville, the chief political strategist for President Clinton, who still shows up as a talking head doing news commentary from time to time. Early in Clinton’s presidency, a particular focus was reducing budget deficits, with the belief that a lower path for future government borrowing would make US Treasury debt seem safer to investors–and thus lead to lower long-term interest rates that would stimulate the economy. For example, David Wessel and Thomas T. Vogel described the dynamic in an article for the Wall Street Journal on February 25, 1993, “Arcane World of Bonds is Guide and Beacon to a Populist President.”
The Clinton budget proposals, along with the economic “dot-com boom” of the 1990s, caused the federal budget to move from a deficit of about 4% of GDP when Clinton took office in 1993 to budget surpluses over four years from 1998 to 2001. But in early 1993, the budget legislation was still taking shape, and Clinton was being briefed on the market for federal bonds almost every morning. In 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.”
Indeed, after President Trump announced his “Liberation Day” package of tariffs back on April 2, adverse reaction from the bond markets for US Treasury debt (along with US stock markets) pushed back, causing Trump to start declaring a series of pauses and suspensions in the tariff timelines that have continued on. Moreover, Trump’s proposed federal budget strategy is the opposite of Clinton’s: that is, Clinton moved toward a balanced budget with the goal that it would also lead to reduced long-term interest rates, while Trump’s proposed tax cuts move away from a balanced budget, and he instead seems to be relying on criticizing the Federal Reserve as a way of trying to reduce interest rates.
For a primer on US bond markets, the Spring 2025 Journal of Economic Perspectives (where I work as Managing Editor) includes a symposium on the subject. As Nina Boyarchenko and Or Shachar note in 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 agencies are often (but not exclusively) related to borrowing money that buys home mortgage debt and turns it into financial securities, like the Federal National Mortgage Association, often called Fannie Mae, and the Federal Home Loan Mortgage Corporation, often called Freddie Mac.) For comparison, the US GDP this year will be about $28 trillion.
When we talk about bond markets “intimidating” politicians, what we are actually talking about is how bondholders view the riskiness of those bonds. But who are the bondholders? Boyarchenko and Shachar offer a useful figure, showing who is likely to hold each category of bonds. They write:
Panel A focuses on US Treasuries. Since the 1970s, foreign investors have played an increasingly dominant role, with their share rising sharply in the late 1990s and early 2000s. Their holdings peaked around 2009 before gradually declining to early 2000s levels by the end of 2024. Other significant holders include pension funds and mutual funds, though their shares have remained relatively stable over time. Panel B examines corporate bonds, where insurance companies have historically been the largest holders. However, their share has steadily declined, while mutual funds and foreign investors have gained prominence, reflecting broader shifts in investment preferences. Panel C presents the major holders of mortgage securities backed by government-sponsored enterprises. Household holdings were more significant in the earlier decades, but over time, foreign investors, mutual funds, and pension funds have increased their presence in this market. Panel D shows the holders of municipal bonds. Households have consistently been the dominant investors, although mutual funds have gained market share over time. Unsurprisingly, unlike the other securities categories, foreign investors play a minimal role in this market. This is largely due to the tax advantages that municipal bonds offer to US investors, as the interest income is generally exempt from federal taxes, and in many cases, state and local taxes. Because foreign investors do not benefit from these tax exemptions, they have less incentive to hold municipal bonds compared to domestic investors. Taken together, the figure highlights the changing landscape of fixed income ownership, emphasizing how different investor groups have adjusted to economic trends and market events over time.
Boyarchenko and Shachar go into more detail on how the Federal Reserve interacts with bond market in its conduct of monetary policy. The other papers in the JEP symposium take separate looks at US Treasury debt, US corporate bonds, and the US municipal bond market. All papers in JEP are freely available, compliments of the publisher, the American Economic Association. The four papers in the bond markets symposium are:
