High-grade Bond Market

Since 1964 record movements in both directions have taken place in the high-grade bond market.

1. Taking “prime municipals” (tax-free) as an example, their yield more than doubled, from 3.2% in January 1965 to 7% in June 1970. Their price index declined, correspondingly, from 110.8 to 67.5.
2. In mid-1970 the yields on high-grade long-term bonds were higher than at any time in the nearly 200 years of this country’s economic history.
3. Twenty-five years earlier, just before our protracted bull market began, bond yields were at their lowest point in history; long-term municipals returned as little as 1%, and industrials gave 2.4% compared with the 4 1/2 to 5% formerly considered “normal.”

Those of us with a long experience on Wall Street had seen Newton’s law of “action and reaction, equal and opposite” work itself out repeatedly in the stock market – the most noteworthy example being the rise in the DJIA from 64 in 1921 to 381 in 1929, followed by a record collapse to 41 in 1932.

1. But this time the widest pendulum swings took place in the usually staid and slow-moving array of high-grade bond prices and yields.
2. Moral: Nothing important on Wall Street can be counted on to occur exactly in the same way as it happened before. This represents the first half of our favorite dictum: “The more it changes, the more it’s the same thing.”

Ref: Intelligent Investor by Benjamin Graham