Investment-Grade Municipal Income in Intermediate to Long Maturities

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

Last week I talked about the income opportunity in short to intermediate investment-grade corporate bonds. This Monday, I want to talk about the income opportunity obtainable in the intermediate to the long end of the curve. Although the Treasury yield curve remains inverted (short-term Treasuries have higher yields than long-term Treasuries), and the corporate curve, albeit elevated, is very flat, the municipal curve, from about 9 years and out is upward sloping.

This means that municipal bond investors are rewarded with more income as they take more interest rate risk by extending out on the curve. This may be appealing while rates reach levels not seen in nearly fifteen years. Although the primary purpose of municipal bonds is often to protect a portfolio’s principal, the market now allows investors to add attractive income for an extended period. Put this in perspective. The average annual total return of the S&P 500 index since the turn of the century (23+ years) is 6.91%. Compare that for a municipal investor reaping tax-equivalent yields from 5% to more than 7% depending on the tax bracket, maturity and municipal bond structure.

Curve Comparisons

High-quality investment grade municipal bonds provide growth-like returns for investors in a relatively more conservative investment vehicle than equities. Have your financial advisor assess the opportunity as it pertains to your specific goals.