Why longer municipal strategies make sense now

Core Insights - Municipal bonds have experienced a rally, with yields dropping and ratios tightening, indicating a positive response from the tax-exempt market after being labeled "cheap" for months [1] - The current market presents an opportunity for investors to reassess the role of municipal bonds in their portfolios, focusing on stability and income rather than seeking immediate exits [2] Group 1: Market Dynamics - The municipal bond curve remains historically steep, allowing investors to earn more income by investing in longer maturities, particularly in high-quality bonds [3] - Intermediate exposures provide a balance between interest rate sensitivity and attractive yields beyond 10 years, while strategies that span the full range of maturities or focus on the long end of the curve present the strongest value [4] Group 2: Tax Efficiency - Long-term municipal bonds can yield equity-like returns with significantly less volatility, especially in high-tax states like California and New York, where tax-equivalent yields can compete with stock market returns [5] - The break-even federal tax rate, which includes federal income tax, Medicare tax, and state income taxes, highlights the appeal of long-term munis for tax-efficient income, particularly for investors in higher tax brackets [6] Group 3: Short-Term Strategies - The front end of the municipal curve is currently rich, driven by demand from separately managed accounts and retail buyers favoring short-duration, high-grade bonds, yet short-dated credit still offers meaningful yield pickup through credit spreads [7]