New Year... Same Story in MuniLand... 50% more yield is gettable by extending maturities

U.S. state and local government debt with longer maturities currently presents "compelling" value in MuniLand. Equity-like TEYS (Tax Equivalent Yields) over 8% remain gettable in longer maturity investment grade Munis. An investor can earn 150bps or 1.5% more yield by extending maturities. For a $1,000,000 investment, we are looking at $15,000 more income if the investor extend maturities... $43,000 vs $28,400. 

Separately managed accounts (SMAs)—customized portfolios popular with retail investors—typically favor MuniBonds that mature in 10 years or less due to their operational constraints. This preference drives down prices for long-dated MuniBonds, making those maturing in 12 to 22 years particularly attractive to flexible managers who are not constrained by typical SMA guidelines.

This value is quantifiable:

As of January 8, the yield on a 10-year AAA MuniBond was about 62% of a comparable Treasury yield—a level indicating high expense not seen since spring 2024. In contrast, cheaper, longer-dated municipal bonds offered better relative value, with 20-year munis yielding 81% and 30-year munis yielding approximately 85% of their Treasury counterparts.

The current AAA Municipal (MMD) yield curve is generally steepening, with shorter maturities seeing falling yields (making them more expensive) while longer maturities have shifted higher, creating attractive value for investors seeking income, even as overall market supply remains strong, indicating a healthy, albeit historically steep, curve with pockets of opportunity for strategic picking.

Key Characteristics of Current AAA Municipal (MMD) yield

• Steepening Trend: The curve has steepened significantly, particularly the spread between 5-year and 30-year AAA munis (5s/30s), reaching decade highs, meaning longer-term bonds offer substantially higher yields relative to shorter-term ones.
• Falling Short-Term Yields: Yields for shorter maturities (like 2-year) have decreased, showing strong reinvestment demand and making them less attractive on a pure yield basis.
• Higher Long-Term Yields: Longer maturities have seen yields rise, enhancing their appeal and creating a historically steep curve that offers better income potential for long-duration investors.
• Strong Demand: High-grade munis have outperformed Treasuries, with elevated market supply being well absorbed, pointing to robust investor appetite for tax-exempt income.