The bond rally that began in the first week of January continued on through last week. In actuality it was a slective rally with only the quality issues being in demand.
Several international corporate issues came at acceptable yield: Province of New Brunswicks at 10.20 percent; the Kingdom of Norways at 9.88 percent, the Export Development Corporation of Canada at 9.85 percent and finally the Inter-American Development Bank issue at 95/8 percent There was good demand for these issues.
On the municipal side the selectiveness continued as the only prime general obligation names that will sell in January, the states of Wisconsin and Oregon were eagerly sought by investors.
The lower quality municipals were picked over and only the higher returning term revenue bonds did well.
Finally the 30 month Federal Farm Credit Banks had a 10 percent return, and 5 year at 9 1/2 percent went to a premium.
The substantial price declines in bonds over the past year offers investors the opportunity to position themselves for long-term capital gains. The purpose is to reduce the amount of tax paid on taxable income and to recoup losses you may have incurred in 1978. It is especially advantageous to individuals in high tax brackets but can prove beneficial to those in lower brackets as well.
To have a long-term capital gain the security must be held one year. Sixty percent of the gain is excluded from taxation and the remainder is taxed at your regular tax rate on ordinary income. For example, if a bond is purchased at a dollar price of 90 or $900 and is sold at 100 or $1,000, you would have a 10-point or $100 long-term capital gain providing you held the bond one year. Sixty percent or $60 would be excluded and you would be taxed at your regular income tax rate on $40.
In setting up a capital gain situation, a bond with a good discount must be purchased. Generally speaking, and assuming a 20-to 30-year maturity, the larger the coupon the less of a discount from par that a bond will trade. Conversely, the smaller the coupon, the larger the discount from par.
When bond prices rise and rates fall it has been the larger coupons that have outperformed the smaller coupons in price movement.
The investor should look for a single A or AA rated utility bond with a coupon between 8 1/4 to 9 percent and a mautority between 20 and 30 years. This give the buyer a discount from par somewhere between 18 and 8 points.