The Bond Buyer (a national publication read widely in public finance circles) has two interesting articles today about the history and future of municipal bond interest rates.
First the history… in Robert Slavin’s article entitled “A Brief History of Fluctuating U.S. Muni Bond Yields”, the newspaper highlights passages of a book called “A History of Interest Rates”:
In the early and mid-19th century, high-grade long-term municipal bond yields were generally a bit more than 5%. Economic historians Sidney Homer and Richard Sylla found this rate to be the norm by studying yields on bonds traded in New England during that period.
In their book, “A History of Interest Rates,” they determined that yields started to slide around 1875, and by 1900 the highest-grade munis offered just 3%.
The Bond Buyer started compiling its 20-Bond Index in 1900. The index shows that from 1900 yields slowly rose from 3% to about 5% by 1920 ….
Other than a brief jump in the mid-1930s, bond yields would subsequently decline until 1946.
On Feb. 14, 1946, The 20-Bond Index reached its all-time low of 1.29%.
“In general, the trend of all interest rates and yields was down from around 1920 to the late 1940s — in part because the U.S. Treasury had the Federal Reserve peg interest rates on U.S. debt at low levels for the decade 1941-1951 to keep World War II financing costs low — and then market yields rose on gradually from the late 1940s to the mid ’60s,” Sylla said.
Municipal bond yields generally continued to rise through the 1970s — a period characterized by high inflation — until peaking early in 1982. The Bond Buyer 20-Bond Index reached its all-time high of 13.44% on Jan. 14, 1982. For 29 years since then yields generally have declined.
A related article in the Bond Buyer looks at the question “Where Will Muni Rates Go Next?”:
Investors may be wondering where municipal bond yields are headed after they reached 45-year lows last week.
Interest rates as reflected by The Bond Buyer 20-Bond Index have fallen nearly 10 percentage points since January 1982, when they reached record high levels. After such a steep decline, it may seem to some that yields could not possibly go lower.
However, a historical view of muni bond yields suggests the market has not hit an impenetrable floor ….
While the 20-bond index closed at 3.60% Friday, the all-time low yield was reached in February 1946, when the index hit just 1.29%.
The article goes on to provide predictions from various municipal research analysts.
Both articles can be read at the Bond Buyer online (some may require a subscription).