Investing Ideas

Finding potential advantages in the bond structure of munis

It's about analyzing when, rather than if, bonds are likely to be repaid

Key Takeaways
  • Municipal bonds are different from other bond sectors because they typically include call options that give the issuer the right to redeem the bonds before their maturity dates.
  • Call options are especially important to municipal bond valuations because most muni bonds are issued with a 5% coupon and, in an environment where muni bonds yield less than that, they price above par with an option that has a positive inherent value at issuance.
  • We believe that analyzing the relationship between a municipal bond’s coupon, call option date, and final maturity date can be an important way that active muni managers add value versus a benchmark.
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Finding potential advantages in the bond structure of munis