From New York Canals to High-Tech Infrastructure: the History of Municipal Bonds
As an investor, it always helps to have a bit of a backstory when deciding where to put your money. If you’ve been following this series of posts, you should have a solid overview of muni bonds, let’s now learn more about how municipal bonds came to exist. In this section, we’ll explore the history of muni bonds and discover how they came to be such an integral part of building this great nation.
How Munis Began
Municipal bonds actually existed well before the issuance of corporate bonds. Back around the time of the Renaissance, Italian city-states started the practice of borrowing money from families that were big in the banking world. While it’s thought that borrowing among U.S. cities began as far back as the 17th century, it wasn’t until the early 1800s when U.S. muni bonds were actually recorded.
The first official muni bond in the U.S. was issued in 1812 by New York City and sought to raise funds for the purpose of building a canal. Six years later, New York State started issuing bonds to finance the construction of the Erie Canal — a $7 million prospect that not only improved the state’s economy, but led to an increase in trading and commerce throughout the country.
Following that, other cities and states began issuing municipal bonds of their own to support infrastructure development and construction. By 1840, the muni bond market was going strong at a remarkable $200 million and rose fivefold over the next four decades. By 1880, there were approximately $1 billion outstanding muni bond issues.
Investing in early municipal bonds was somewhat of a risky prospect, fueled in part by the 1837 Panic that would, in turn, fuel a five-year recession. During this time, many banks collapsed, unemployment grew rampant, and eight states found themselves unable to repay their bondholders. However, it wasn’t just munis that were impacted; economic conditions across the country were just generally bleak.
There was a silver lining for munis: These events helped some states learn to restrict their borrowing going forward, as those impacted recognized that with every default came a lower probability of enticing investors in future bond issuances. This helped stabilize the muni market on a whole while making bonds a safer choice for investors going forward.
Munis: A Silver Lining
Once the economic picture began to improve, municipal bonds picked up again, and by the time the 1920s rolled around, the total outstanding amount of U.S. municipal debt reached a whopping $16 billion. Around this time, state and local governments began creating debt-issuing entities that were termed “authorities,” which played a key role in improving and developing facilities and infrastructure to benefit the masses. The two most well-known were the Port of New York Authority, formed in 1921 (which was renamed Port Authority of New York and New Jersey in 1972), and the Triborough Bridge Authority (which is now known as the Triborough Bridge and Tunnel Authority), formed in 1933.
When the Great Depression hit, municipal bonds served as a major bright spot. Around this time, workers began construction on the Golden Gate Bridge, an effort funded primarily through the sale of municipal bonds. Despite the unfavorable economic conditions that plagued the country as a whole, in a show of faith, voters in the Golden Gate Bridge and Highway District approved a $35 million bond issue for which they offered up their homes, farms, and businesses as collateral. The bridge opened in 1937, and the bonds were ultimately paid back in full.
As the U.S. economy started to rebound following the Great Depression, bond issues quickly became more prominent. In fact, bond issuances picked up following World War II, as many cities and states sought to raise funds to cover a wider array of projects, from housing to roads to private hospitals to roads and transportation.
1971 also saw the introduction of municipal bond insurance, which helped add a layer of security for investors. The first municipal bond insured that year was designated to fund a hospital for the town of Greater Juneau, Alaska — a remote project from which investors may have otherwise shied away. Since insurance protects bondholders from loss of principal or missed interest payments, coupled with reasonable due diligence, it gives investors added peace of mind. In fact, insurance helped the muni bond market boom over the next three and a half decades.
More Recent History
Over the past 40 years, muni bonds have played a big role in shaping cities, states, and communities. Between 2003 and 2012, a total of $3.2 trillion was invested in infrastructure through municipal bond issues. Some of the more notable projects in recent years include:
- Denver International Airport: The $3.2 billion airport opened in 1995 and was built in part by municipal bonds. It now helps bring in $22 billion a year to fuel Colorado’s economy.
- MARTA: Bonds were used to build the Metropolitan Atlanta Transit Authority (MARTA). It is now the most cost-efficient way to get around Atlanta.
- Chicago’s Millennium Park: The park, a $475 million project, was largely funded with municipal bonds. It is now a major point of interest for residents and tourists alike.
The Outlook For Muni Bonds
Many are optimistic that munis will continue to uphold their trend of historically low defaults. And since munis outperformed stocks and corporate bonds in 2014, keep reading this guide to learn if they could be a good investment strategy for you. As you read through this series, you’ll learn more about the benefits of muni bonds and why so many consider them a solid investment.
[mailchimp_cta cta=”Sign up today & receive the next chapters of this series in your inbox!”]