By John Patrick Lee, CFA
What is Roll Yield?
Roll yield is a term used to describe the increase in price that an investor can receive as a bond’s maturity ages. When a bond gets closer to its final maturity, its yield typically decreases, causing an increase in its price. This price appreciation is known as roll yield and is a desirable feature for investors, especially when targeting intermediate-term bonds with wider yield differentials between maturities. This strategy can potentially generate alpha and enhance an investor’s total return.
How Can I Use Roll Yield to Boost Return?
The muni yield curve is an important indicator of the health of the municipal bond market and the broader economy. The muni yield curve has recently become inverted in the short end, meaning that yields of some longer-dated municipal bonds are lower than those of shorter-term bonds. However, the intermediate part of the curve remains positively sloped and steep, providing attractive roll yield for investors who target these maturities. Steepness refers to the degree of absolute difference between yields of different maturities.
Max Roll Yield in the Steepest Part of the Curve
Source: VanEck as of 3/31/2023. Past performance is no guarantee of future results.
As bonds move closer to final maturity, they typically will have a lower yield each year as they roll down the curve. When a bond’s yield drops, its price increases (yield and price move in the opposite direction). A strategy targeting the steepest part of the curve may benefit by accessing this roll-yield effect and the inherent price boost that occurs as bonds age. Despite an inverted curve at the short end of the curve, the majority of the intermediate section remains steep.
How do Intermediate-Term Bonds Enhance the Roll Yield Effect?
The VanEck Intermediate Muni ETF (ITM) targets bonds with maturities of 6 through 17 years. Municipal bonds in this maturity range have historically provided a greater roll yield effect due to these wider yield differentials between maturities. Roll yield refers to the amount of price appreciation that occurs as its maturity ages. Intermediate-term bonds’ higher-than-average spreads between maturities can generate alpha, as the bigger spreads between yields lead to larger price moves. In addition to the benefits of tax-free income, a targeted allocation to this part of the municipal yield curve may help boost an investor’s total return due to this enhanced, historically-persistent feature.
Originally published by VanEck on May 16, 2023.
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The VanEck Intermediate Muni ETF (ITM) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the ICE Intermediate AMT-Free Broad National Municipal Index (MBNI), which is intended to track the overall performance of the U.S. dollar-denominated intermediate-term tax-exempt bond market.
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