Government Bonds, Government Borrowing

The reader may wonder why all this hocus pocus, involving an apparently “personal guarantee” by our Secretary of Transportation, and a higher cost to the taxpayer in the end. The chief reason for the indirection has been the debt limit imposed on government borrowing by the Congress. Apparently guarantees by the government are not regarded as debts-a semantic windfall for shrewder investors. Perhaps the chief impact of this situation has been the creation of tax free Housing Authority bonds, enjoying 94 The Intelligent Investorthe equivalent of a U.S. guarantee, and virtually the only taxexempt issues that are equivalent to government bonds. Another type of government backed issues is the recently created New Community Debentures, offered to yield 7.60% in September 1971.

3. state and municipal bonds. These enjoy exemption from Federal income tax. They are also ordinarily free of income tax in the state of issue but not elsewhere. They are either direct obligations of a state or subdivision, or “revenue bonds” dependent for interest payments on receipts from a toll road, bridge, building lease, etc. Not all tax free bonds are strongly enough protected to justify their purchase by a defensive investor. He may be guided in his selection by the rating given to each issue by Moody’s or Standard & Poor’s. One of three highest ratings by both services-Aaa (AAA), Aa (AA), or A-should constitute a sufficient indication of adequate safety. The yield on these bonds will vary both with the quality and the maturity, with the shorter maturities giving the lower return. In late 1971 the issues represented in Standard & Poor’s municipal bond index averaged AA in quality rating, years in maturity, and 5.78% in yield. A typical offering of Vineland, N.J., bonds, rated AA for A and gave a yield of only 3% on the one year maturity, rising to 5.8% to the 1995 and 1996 maturities.