History of the United States’ Bond Market:
The history of bonds in the United States consists of multiple periods of issuance. The predominant bond markets in the United States are issued in the forms of corporate bonds, municipal bonds, and government bonds issued by the United States Treasury.
Bonds are issued by financial institutions and government bodies to raise money through the issuance of a “promise.” For a fee, an individual or corporation will purchase a bond from an issuing agency; the issuing agency will use the money to fund a project or carry-out an objective. In turn, the investor will receive his or her payment back plus interest once the bond reaches its maturity date.
Through the sale of Liberty Bonds, the United States government amassed over $21 billion dollars of debt that were paid out following the war. The surplus gathered from the issuance of the bonds; however, were not enough to cover the debt from the war, so the bonds were rolled over into bills (matured in less than one year), notes (matured in less than ten years) and government-issued bonds (matured in more than 10 years.) These bonds, notes, and bills were subsequently paid down regularly until borrowings increased during the Great Depression.
Changes in the United States Debt Market
The auction format enabled the yields in each maturity were used by the public to incorporate a risk-free investment strategy. As a result of this formation, other forms of bonds (such as municipal and corporate bonds) developed through a synthetic yield in proportion to credit considerations.
The Rise of Bonds
As the debt of the United States’ government grew, foreign governments became holders of the United States’ debt. The deficits, which rose during World War II and the Vietnam War, spawned a debt market and the increase of debt-related trading instruments between government bodies.
In the early 1980s, bond yields rose exponentially due to the increases in commodity prices, expanding deficits, and labor wage increases. Bond yields rise, because the market anticipates rising amounts of future debt; the need for funding becomes so dire that the issuing agencies will increase yields to spark investments. As a result of this, the yields of corporate credits will also rise, but are viewed as riskier investments when compared to government-issued bonds, which are guaranteed.