Municipal Bond Forum
Why go long now?
Q
With the inverted Treasury yield curve and the muni bond curve being visibly flat, do you still advise investors to buy long muni bonds? Why would one want to risk buying long-term bonds when there is no reward to extend out in the curve? What do you think about investing 80% of one’s portfolio in short term bonds and 20% in equities?
A
James A. Klotz responds:
The one thing we know for sure about an inverted yield curve is that it eventually reverts back to normal. This occurs when the Fed completes its tightening cycle and stops pushing up short-term rates. Historically, this has created a problem for income investors attracted by unusually high, but temporary, short-term interest rates.
The Fed will only stop raising rates when inflation is no longer a concern or if the economy slows significantly. Either occurrence will be anticipated by the long end of the market and it will no longer offer the yields available today. Be careful! While you are attempting to eliminate “market risk” you are exposing yourself to “income risk.” Why buy long term bonds today? Call protection!
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