We remarked at the end of both quarters one and two that record municipal new issuance combined with investor concerns about elevated inflation had resulted in the steepest one-to-30-year municipal curve in over three years. Halfway through August that upward sloping municipal curve has not reversed, or even slowed, but rather moved to its steepest slope in ten years (chart). *
AAA Municipal Bond | 1/2/2025 | 3/31/2025 | 7/1/2025 | 8/19/2025 |
One Year | 2.95 | 2.58 | 2.54 | 2.22 |
Thirty Year | 3.82 | 4.25 | 4.47 | 4.6 |
Spread | 0.87 | 1.67 | 1.93 | 2.38 |
The steeper municipal curve results in higher absolute yields and higher interest rates in the 15-30-year maturity range within which we prefer to invest. Fixed income prices decline when interest rates rise, and our portfolios are not an exception to that rule.
However, through our disciplined, active approach to portfolio construction and management we have 1) accrued additional yield through the purchase of longer maturity bonds versus shorter final maturity bonds as well as 2) generated significant alpha, or additional total return, for our Core Plus clients in 2025 when compared to our passive municipal index.
As of Friday, August 22, our Core Plus composite has generated a total return of +2.66% versus the total return of our Bloomberg Index (LMBITR) of +0.06%. We are proud of that return profile.
Per above return attribution is twofold:
- First AHW’s 5% purchase in 30 years generates a lot more income than a 3.75% purchase in 15 years which is what AA rated debt returns in those maturities.
- Secondly, we take advantage of the inefficient pricing process when our calendar gets heavy. New issue estimates for 2025 run between $510 BN (JPM) to $560 BN (Hilltop) versus 2024’ $464 BN total, or 13% - 21% higher year over year. Excess supply has provided ample opportunities for us to buy at wholesale prices and hold such bonds until retail demand appears - and then sell. For example, during one single August day eight separate Texas entities issued debt, resulting in significant price dislocation! We believe such investment opportunities will remain plentiful this year, allowing AHW to replicate our performance during the first 7 ½ months of 2025.
While variables like elevated municipal and treasury debt and stubborn inflation may further impact our marketplace this year, we are excited to construct baseline AA rated portfolios with 5.00% tax-exempt yields (TEY > 8.30% for top tax - bracket payers) that are overlaid with our Core Plus strategy which can generate additional return for our clients.
Reach out with questions.
Steve Wool
*Bloomberg Data Services and Wells Fargo Research