Municipal Bond Forum
Muni bond yield curve historically steeper than Treasury, corporate bonds
Q
As a client of FMSbonds and active muni bond investor, I read your article about laddering with interest but felt that it raised some unanswered questions. First, isn’t your critique of laddering really a product of a steep yield curve? Would your criticism of laddering soften if the yield curve flattened out so that short-term bonds yielded substantially more in relation to long-term bonds than they currently do? Secondly, in the current market, would you be as critical of laddering, which encompasses maturities from, say, 10 to 30 years as opposed to holding a portfolio of all 30-year plus bonds?
A
James A. Klotz responds:
Your point regarding the yield curve is correct. One needs to understand however, that the municipal bond yield curve is historically steeper than that of Treasury or corporate bonds.
We have no quarrel with those who recommend laddering other fixed-income securities, but it is a flawed strategy for munis.
If you read some of the earlier material on our Web site on this subject, you will find we use examples that date back to the 1970s and the results are the same.
We would not want to give the impression that we only recommend buying 30-year bonds. If an investor can capture a good percentage of the available income on shorter bonds, we are all for it.
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