Municipal Bond Forum
Is history a predictor of rates?
Q
Between 1980 and 1982, yields on fixed municipal bonds fluctuated between 8.5% and 14%, CPI declined from 14% in Feb. 1980 to 7.6% in Feb. 1982. Does history predict the future? How high do you anticipate inflation to rise over the next year or two? Do you anticipate it to stay elevated for an extended period? Do you expect there to be a direct correlation (as in the 1980s) to the muni yield?
A
James A. Klotz responds:
There will always be a relationship between inflation and all fixed-income investments, since inflation erodes the value of fixed interest payments.
We are not expecting a significant rise in inflation over the next two years. The economic environment we are experiencing today reflects an unprecedented period of global deleveraging which, in our opinion, and in the opinion of Federal Reserve Chairman Ben Bernanke, makes deflation a greater threat than inflation.
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