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The Long-Run Linkage Between Yields on Treasury and Municipal Bonds and the 1986 Tax Act


  • William J. Crowder

    (University of Texas at Arlington)

  • Mark E. Wohar

    (University of Nebraska at Omaha)


The Tax Act of 1986 changed the tax treatment of tax-exempt municipal bonds for banks. Since banks were the dominant participant in the municipal bond market until 1986, some believe that this resulted in the breakdown of the long-run equilibrium relationship between municipal and U.S. treasury securities of equal maturity. We present evidence that there was a significant break in the relationship around the time of the Tax Act and that once this break is accounted for, the relationship between municipal and treasury yields remains intact.

Suggested Citation

  • William J. Crowder & Mark E. Wohar, 1997. "The Long-Run Linkage Between Yields on Treasury and Municipal Bonds and the 1986 Tax Act," Finance 9702005, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:9702005
    Note: Type of Document - Postscript; prepared on IBM PC ; to print on PostScript; pages: 26; figures: included

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    More about this item


    municipal bonds; tax-exempt; 1986 Tax Act;

    JEL classification:

    • G - Financial Economics


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