What happened to municipal bonds around 1980?
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What happened to municipal bonds around 1980?
Link to Chart
If you take a look at the chart, you'll find that around 1979-82, something happened to intermediate-term municipal bonds that caused them to go down 24%. Long-term corporate bonds (which you would think would be more volatile than these intermediate-term municipal bonds, if the cause was the high inflation and interest rate volatility of the late 70s and early 80s) did not suffer this drawdown, nor did intermediate-term corporate bonds or intermediate-term treasury bonds. What happened here? Why did municipal bonds go down so sharply compared to other bonds?
Limited-term and long-term munis were also affected, but not short-term.
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Re: What happened to municipal bonds around 1980?
Hmmm
I can remember in 1986 the Tax Reform Act made munis less attractive for some.
It may be the cuts in marginal tax rates adopted by the Congress in 1981 made Munis sharply less attractive to high income investors, and so they sold off.
Otherwise I don't know.
Taylor?
I can remember in 1986 the Tax Reform Act made munis less attractive for some.
It may be the cuts in marginal tax rates adopted by the Congress in 1981 made Munis sharply less attractive to high income investors, and so they sold off.
Otherwise I don't know.
Taylor?
Re: What happened to municipal bonds around 1980?
June of 1983 began the time that bearer bonds were no longer permitted, and therefore the registered bonds were no longer attractive to those who had previously purchased municipals to hide illegally obtained funds. This didn't apply to municipals with maturites of less than one year.
Also, the Tax Reform Act of 1986 greatly limited the issuance of private activity bonds. Both of these changes made municipals less attractive to many investors.
John
Also, the Tax Reform Act of 1986 greatly limited the issuance of private activity bonds. Both of these changes made municipals less attractive to many investors.
John
Re: What happened to municipal bonds around 1980?
A reduction in the LT capital gains rate? Between 1978 and 1982 it went from 39.875% to 28% to 20%. http://www.taxpolicycenter.org/taxfacts ... ?Docid=161
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Re: What happened to municipal bonds around 1980?
But we saw no such sharp downturn in municipal bonds when the long-term capital gains rate went from 29.19% in 1997 to 16.05% in 2003.
Maybe the double whammy of interest rate / inflation fluctuations and tremendous capital gains rate reductions over a short period of time was what caused it?
Maybe the double whammy of interest rate / inflation fluctuations and tremendous capital gains rate reductions over a short period of time was what caused it?
Re: What happened to municipal bonds around 1980?
Municipalities faced increased spending overall during early 80's recession but they were hampered by reduced revenues & broad unpopularity to raise taxes. The decline in munis were the result of few factors. The high interest rates during the 1980s made it almost impossible to issue municipal bonds. Municipalities also worked zeros into their debt structures beginning in early eighties. The Tax Reform Act of 1986 lowered the maximum tax bracket to 33 percent, making the tax-free aspects of municipals less attractive. In the face of high debt costs, declining demand, and decreasing bond ratings, municipalities began issuing zeros with U.S. Treasury-backed zeros as collateral.
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Re: What happened to municipal bonds around 1980?
I think it must have been due to the increased municipality spending, reduced revenues, inability to raise taxes, and high interest rates. All the damage seems to have been done from late 79 to late 81. The ERTA, the first of the Reagan tax cuts, was passed on August 19th 1981, and afterwords the municipal bonds began to recover, which leads me to believe that it couldn't have had much to do with federal income tax policy.
Were municipalities just unable to keep up with high interest rates by issuing 10%+ interest bonds?
Were municipalities just unable to keep up with high interest rates by issuing 10%+ interest bonds?
Re: What happened to municipal bonds around 1980?
Bumping this topic for more comments.
Because I hold munis in my taxable, I am concerned about duration risk, along with potential demand decreases due to tax legislation.
Many on this forum recommend munis in lieu of total bond in taxable accounts, but the scenario which transpired during the late 70s / early 80s is scary - a 50% decrease when looking at the inflation adjusted drawdown.
Thoughts as we face increasing rates and new tax legislation?
Because I hold munis in my taxable, I am concerned about duration risk, along with potential demand decreases due to tax legislation.
Many on this forum recommend munis in lieu of total bond in taxable accounts, but the scenario which transpired during the late 70s / early 80s is scary - a 50% decrease when looking at the inflation adjusted drawdown.
Thoughts as we face increasing rates and new tax legislation?
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Re: What happened to municipal bonds around 1980?
I'm glad you asked this question. 90% of my bonds in my taxable account are Intermediate National munis and Long Term NYC munis. I've been feeling a little over-exposed there.
But at least my 401k has a normal bond fund (AGG) to help balance things out.
But at least my 401k has a normal bond fund (AGG) to help balance things out.
Re: What happened to municipal bonds around 1980?
Having invested in tax exempt intermediate bonds in the early '80s I suggest it was the extreme interest rates.Dr. Gaius Baltar wrote: ↑Sat Feb 11, 2012 3:54 am
Link to Chart
If you take a look at the chart, you'll find that around 1979-82, something happened to intermediate-term municipal bonds that caused them to go down 24%. Long-term corporate bonds (which you would think would be more volatile than these intermediate-term municipal bonds, if the cause was the high inflation and interest rate volatility of the late 70s and early 80s) did not suffer this drawdown, nor did intermediate-term corporate bonds or intermediate-term treasury bonds. What happened here? Why did municipal bonds go down so sharply compared to other bonds?
Limited-term and long-term munis were also affected, but not short-term.
https://www.brookings.edu/wp-content/up ... tes2-1.png
As rates rise bonds decline. Knowing nothing about duration effects at the time I bought some TRP TE bond funds. I lost about 30% in a few months time as rates went up to 14% or more.
Re: What happened to municipal bonds around 1980?
We've been facing increased interest rates for years now and there has been very little impact, other than my money market fund is getting more than 1%, up from 0.05%.
Speculating on future legislation is against forum rules and a bad idea on which to change one's portfolio until it is actually signed into law (once it is in both House and Senate bills, you might want to start making some plans though).
Speculating on future legislation is against forum rules and a bad idea on which to change one's portfolio until it is actually signed into law (once it is in both House and Senate bills, you might want to start making some plans though).