Short demand creates longer yield opportunities - Butler Financial, LTD
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Short demand creates longer yield opportunities

Beau Snowden discusses fixed income market conditions and offers insight for bond investors.

Most investors of individual bonds hold their bonds to maturity or until they are called by the issuer. However, the bond market can present opportunities to improve the composition of portfolios, by taking gains, or improving portfolio yields with duration swaps. Municipal bond yields, pressured by demand from concerned investors and fund managers who were forced to reduce duration, have declined on the short end of the yield curve. Inside of five years, the yield curve is relatively flat, but spread to Treasuries begins to widen with longer maturities. What does this mean for investors? This presents some investment opportunities.

Low yields on short maturing bonds make for strong bids on short maturing bonds. Investors in municipal bonds have two reinvestment opportunities in the current market. The first is a duration swap. Sell the short maturing bond and buy a longer maturing bond where spreads to Treasuries are wider. One year maturing AAA municipal bonds are trading at 67% of Treasuries. This holds true for maturities out to 5 years. In the 10 year maturity space, AAA municipal bonds are trading at 82% of Treasuries. This allows investors to locks into yields not seen in years and can improve upon the average portfolio yield.

For investors wishing to reinvest into shorter (less than 10 year) maturities, taxable bonds may be more beneficial to investors than the tax advantaged municipal bonds on an after tax basis. The investor has a choice of swapping out of municipal bonds into taxable bonds or wait for the municipal bonds to mature. The current market allows investors to not have to wait and reallocated bonds into taxable alternatives where they can maximize the after tax yield. This can sometimes be done without having to buy longer maturities as the swap may work with similar maturities.

Call your financial advisor to discuss these opportunities and see if they fit with your investment goals.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

To learn more about the risks and rewards of investing in fixed income, access the Securities Industry and Financial Markets Association’s Project Invested website and Investor Guides at, FINRA’s Investor section of, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at

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