Municipal Bond Forum
Historical yields
Q
I came across a historical chart of 20-year municipal bond yields that spanned the mid 1960s through today. I noticed that municipal bond rates rose dramatically in the 1970s and 1980s. As a matter of fact, muni yields rose above 10% in the 1980s. What caused the rise?
A
James A. Klotz responds:
It wasn’t only municipal bond rates that skyrocketed during that period. Short-term CDs and Fed fund rates, at one point, exceeded 20%, while 30-year Treasury bonds yielded over 15%.
The major cause was the oil crisis of 1979, which was characterized by gas shortages and soaring prices at the pump. Inflation flames were further fanned by dramatic increases in the money supply, as the Federal Reserve artificially fixed short-term interest rates below the rate of inflation.
These extraordinarily high rates did not begin to retreat until Paul Volker was installed as the new Fed chief and immediately raised short-term interest rates by 200 basis points. This had a chilling effect on the economy. During the period of recession that followed, interest rates on all bonds began a long, steady decline.
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