Fixed Income Market Update

October 14, 2022

It’s an old saying and it’s hard to refute. Can you have your cake and eat it too? Sometimes in the fixed income markets, the answer is yes you can. Each day, the market shifts, rates change, and laws and regulations get passed. While these changes present challenges to some, those looking through a longer lens can see opportunities. We see an opportunity now in Muni Land.

We could go on about the value in long municipals, it’s there, look at the tables below. We could go on about the opportunity in de minimis bonds for IRA’s and the like, but that’s for another commentary. What we see now is another cycle building to create value on top of the value already in long term, tax free municipal bonds. That opportunity is in new issue municipal debt, issued on new projects. This debt will have a nice yield, but it will also have a nice potential kick in the future.

The 2018 Tax Cuts and Jobs Act, restricts newly issued municipal debt to a one-time refinance. Build a new school now at these rates, if rates come down you get one chance to refinance at a lower rate. But in Muni Land, a refinance doesn’t call in the old bonds, it defeases the old issue, by buying US Treasuries sufficient to pay the remaining coupons and the principal and placing them with the paying agent. Boom! We would then own a tax-free municipal bond, backed by the US Government. 

We had our cake, we got a great tax-free yield on a high-quality municipal bond, and we might eat it too, if it gets defeased and trades like other defeased bonds and tightens significantly. Will this take time, absolutely, but time is your friend with bonds. We can invest with a horizon, look for specific potential events and position the portfolios today to benefit now and in the future.

-Peter Baden, CFA
Chief Investment Officer

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Disclosures

Indexes used for AAA Municipal Yields

2 Year: BVAL Municipal AAA Yield Curve (Callable) 2 Year (Symbol: CAAA02YR BVLI)

5 Year: BVAL Municipal AAA Yield Curve (Callable) 5 Year (Symbol: CAAA04YR BVLI)

10 Year: BVAL Municipal AAA Yield Curve (Callable) 10 Year (Symbol: CAAA10YR BVLI) 

30 Year: BVAL Municipal AAA Yield Curve (Callable) 30 Year (Symbol: CAAA30YR BVLI)

Indexes used for US Treasury Yields

2 Year: US Generic Govt 2 Year Yield (Symbol: USGG2YR)

5 Year: US Generic Govt 5 Year Yield (Symbol: USGG5YR)

10 Year: US Generic Govt 10 Year Yield (Symbol: USGG10YR)

30 Year: US Generic Govt 30 Year Yield (Symbol: USGG30YR)

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