The municipal bond market is anything but static. It’s always changing. So your investment approach should be flexible and dynamic as well.
One way the market changes is the shape of the curve. Take the last two years.
In 2023, the curve was partly inverted. What that means is that yields for intermediate bonds were lower than shorter bond yields. At the end of last year, the curve had moved back to a more normal shape. And today, the curve is as steep as it’s been in 10 years. It’s especially steep in that 15- to 20-year area.
So what does this mean? To us, it means municipal investors should consider taking advantage of the long end of the curve. However, that doesn’t mean just buying long bonds. So today, we think investors should consider barbelling their holdings between short bonds and bonds in that 15- to 20-year range. And here’s why.
If the curve remains steep, bondholders would not only earn that extra yield, they’ll also get a price bump from roll. So what is roll? Quite frankly, roll is something only a bond geek can get excited about. But roll is, in essence, profiting through the passage of time. When a curve is upward sloping, the yield on a bond declines as it approaches maturity. And because yield and price move in opposite directions, its price rises. The steeper the curve, the bigger the price effect from roll.
But if the yield curve flattens, which we currently expect, yields on these longer bonds would fall. And what does that mean? It means a nice potential price boost for investors who own them.
Being able to take advantage of changes in the yield-curve shape is just one of many reasons why an active and flexible investment approach can add value for municipal bond investors.