Working Paper: NBER ID: w24258
Authors: Daniel R. Feenberg; Clinton Tepper; Ivo Welch
Abstract: Contrary to common perception, many fixed-income investors have not suffered unusually low real interest rates in and after the Great Recession of 2008. This is because taxable investors must first pay taxes on nominal interest returns, before inflation further reduces their earned real interest rates. To obtain the same real after-tax yield, investors need more than one-to-one compensation for inflation. As a result, long-term Treasury bonds have been no less attractive for taxable investors in 2016 (with a 1.0% post-tax real yield) than they were in 2006 (0.5%), 1976 (–1.7%), 1966 (0.9%), and 1956 (0.8%), although they have been less attractive than they were in 1996 (2.4%) and 1986 (2.9%). Short-term Treasury bond yields have been on the low side but have also not been particularly unusual.
Keywords: interest rates; taxation; real yields; fixed income; investors
JEL Codes: E0; E21; G0; G12; H0; H2; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Taxation (H20) | Perception of interest rates (E43) |
| Nominal interest rates (E43) | Post-tax real yields (H29) |
| Effective tax rates on interest income (E43) | Perception of yield (E43) |
| Nominal interest rates (E43) | Real after-tax yield (G19) |
| Real interest rates (E43) | Investment strategies (G11) |