The U.S. municipal bond market provides a natural laboratory, free of impediments to capital flows across states or currency considerations, to assess how the composition of ownership of government debt affects government bond prices and real economic outcomes. We exploit quasi-exogenous variation in local (in-state) bond ownership arising from variation in state tax privileges for state-resident bondholders. A high in-state holding of local government debt is associated with higher susceptibility of government bond prices to demand and supply shocks, heightened sensitivity of bond prices to local political uncertainty, and difficulty raising capital for public projects during crises.