• Bond prices fluctuate with interest rate levels.business report image by Christopher Hall from Fotolia.com
  
  The U.S. debt market puts sellers of debt instruments, such as the U.S. Treasury and corporate borrowers, together with buyers of debt. Debt instruments also include mortgages, promissory notes, bonds -- U.S. Treasury, corporate and municipal, the fixed income market -- and Certificates of Deposit, usually offered to customers of a bank, credit union or other financial institution for a specific time period. The debt market also includes short-term instruments that make up the money market.
  
  

Bonds and Fixed Income Markets

• Bonds allow the U.S. Treasury, corporations, and municipal governments and agencies to finance their operations. Bonds have short-, intermediate- and long-term maturities. Typically, longer bonds bear higher interest rates, also called coupon rates. Bonds represent senior obligations of any borrowing entity. When a government or government agency issues bonds, these instruments usually reflect the "full faith and credit" of the issuer and therefore have historically low principal and coupon repayment defaults.
  
  U.S. Treasury bond prices, considered a secure investment, fluctuate with interest rate levels. For example, the daily yield curve of U.S. Treasury instruments shows only a few basis points' difference between the 20- and 30-year bonds: 4.37 percent yield for 20 years and 4.53 percent for 30 years, on May 3, 2010. Weeks later, the yield on the 20-year bond declined to 3.91 percent and to 4.07 percent for the 30-year bond.
  
  Interest rates declined on the long end of the market, causing bond prices to rise and yields to fall.
  
  

Taxation of the U.S. Debt Markets

• Only municipal bonds offer potentially tax-free income to investors. If you live in New York, for example, purchasing municipal bonds in New York provides income free of state and federal taxes. The municipal bonds of any other state do not qualify for state tax-free income. Investors in New York City often purchase triple-tax-free bonds that are free of federal, state and local taxes. Because of tax savings, these bonds usually bear lower coupon rates when compared to out-of-state issuers with similar maturities. Ask your financial adviser about what municipal bonds work best for you.
  
  Interest on U.S. Treasury bills, bonds and notes is federally taxable only. Some agencies of the U.S. government, such as the Government National Mortgage Association, bear fully taxable interest. However, Ginnie Maes pay down principal and interest, so investors and advisers must keep return of principal in mind when calculating taxes due on this investment.
  
  

Money Markets

• Money market funds, often used like savings accounts by investors, may not be FDIC-insured. Outflows from money market funds increased in 2010 because rates have declined and investors have become more aware of potential risk in some fund securities.
  
  Money markets are composed of short-term instruments like commercial paper, asset-backed commercial paper, repurchase agreements, bankers' acceptances, Eurodollar deposits and even foreign exchange swap instruments. Rates fluctuate because of issuance rates of these instruments.
  
  Issued by corporations, commercial paper usually trades in the institutional market. However, some corporations sell these short-term instruments directly to retail investors.