Investment grade municipal bonds have seen yields flatten and long non-call par bond yields are inverted. Will this end badly for the long end? I don’t think we are looking at a ‘chain saw massacre’ any time soon. The primary driver of yields on the long end of the muni market remains a technical supply shortage vs demand for good quality bonds.

 

Chart 1: MBIS Yield Curve

 

The flattening of the muni curve over the last several weeks has been a significant 29bps and this is something to keep an eye on going forward.

 

Chart 2: The two year to thirty year yield spread for municipal bonds

 

The muni market is a premium bond market (higher coupon than yield) but there are par bonds in the market place. That said, the non-call par bond muni bond market is a very small part of the market and that is most likely the reason for the long end to be slightly richer.

 

Chart 3: Par bond equivalents tracked by MBIS


James (J. R.) Rieger
Fixed Income Author & Speaker