Municipal Bond Forum
Yield curve
Q
We all know about the yield curve, which shows that the mid range is the best place to buy bonds. That is 10 to 14 years out. In the current interest rate climate, why lock yourself in for 30 years? I ladder my portfolio by buying 10- to 12-year bonds, preferably Baa. I have been doing this successfully for 35 years.
A
James A. Klotz responds:
We agree that in today’s market, there is value to be found in the intermediate range of the yield curve because the curve has flattened since last summer. As you know, this has not always been the case.
We are sure that your strategy has served you well over the years. However, since we are willing to bet that over these 35 years you never sold a bond to raise cash, you theoretically could have fared even better by buying longer-term bonds.
Even in today’s market, assuming an intermediate rate of 4.125% and a long-term rate of 4.75%, the long-term bond produces 15% more income each year. On $100,000, this would provide an additional $625.00 of tax-free income annually for reinvestment (plus 30 years of compounding this additional income).
Start here.
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