What Is Clinton Bond?
A Clinton bond is a slang term for a debt investment that is said to have no principal, no interest and no maturity value. It is a derogatory reference to President Bill Clinton's interest-rate policies that had bondholders lose billions of dollars early during his presidency.
- Clinton bond is a slang term for a debt investment that is said to have no principal, no interest and no maturity value.
- Clinton bond is a derogatory reference to President Bill Clinton's interest-rate policies that saw bondholders lose billions of dollars early during his presidency.
- History shows that the policies of the Clinton administration actually placated the bond market rather than inciting it as the term Clinton bond implied.
Understanding Clinton Bond
Inflation fears hurt bonds – turning them into Clinton bonds – early in the President’s first term in office, causing yields to increase temporarily. These fears were unfounded, however, with Clinton choosing to balance the budget instead of increasing the federal deficit, allowing bond prices to recover. Indeed, inflation – one of the biggest risks for bonds – remained under control for most of Clinton’s two terms in office, rising close to 4.0% in 1999 and 2000 as asset prices climbed.
Negative perceptions of former President Clinton's ability to manage the economy formed the foundation for this type of bond. Clinton bonds are also known as "Quayle bonds", named after former Vice-President Dan Quayle. This rarely seen slang term is more often used to make a point, than to actually represent a market bond.
10-year Treasury rates stood at 6.2% when Clinton completed his first month in office in January 1993. Yields initially declined, falling as low as to 5.3% as the new Democratic administration was forming its economic policy. However, once Clinton implemented his fiscal policies of tax increases and reduced entitlement spending late in 1993, rates began to increase, topping out at 8.0% in November 1994. As interest rates and bond prices move in opposite directions, bond prices fell. In fact, as measured by the Lehman Brothers Aggregate Index, bonds declined 2.9% in 1994, one of only three calendar year losses for fixed income since 1976.
Rationale and Misconceptions of Clinton Bonds
Absolute losses for bonds over mid to long-term periods are rare and caused consternation for professionals in the bond community accustomed to a friendlier trading environment. For the previous 12 years prior to Clinton implementing his deficit reduction agenda, the higher spending and interest rate reductions under the deficit-friendly Reagan and Bush administrations had supported a bull market for bonds. Bond market returns were more restrained under Clinton but that does not tell the whole story.
The term Clinton bond may have served its purpose at the time, but a look back at the history of the Clinton administration shows that the President actually placated the bond market more than inciting it. Several Clinton biographies reveal that the President reined in his plans for more expansionary fiscal policy to maintain relative peace with Federal Reserve Chair Alan Greenspan and the bond market.