With investor demand focused on the front end of the yield curve, longer maturities have been neglected, leading to a divergence from Treasury yield movements. We believe valuations for long-dated municipal bonds offer the high-taxed individual an attractive entry point here.
The 30-Year Municipal to Treasury ratio, M/T for short, is a common valuation indicator that can easily spot undervalued and overvalued market conditions. As of early February, the 30-Year M/T ratio was greater than 100%, which has historically been a great time to enter the market.
The benefit to taxable investors is that current 30-year municipal yields are offered at the same yield level as equivalent Treasuries. For an investor with a 35% effective tax rate, the after-tax benefit for owning municipal bonds equates to approximately 1.00% of additional yield. If investors can withstand a modest level of price volatility, extending the maturity profile of a portfolio’s bond allocation will pay dividends over time.
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