A Historic Dislocation: Opportunity at the Long End of the Municipal Curve

Morgan Stanley

Craig Brandon

Research

8 Pages

Morgan Stanley highlights the rare steepness in the municipal yield curve, with long-dated bonds underperforming short maturities by nearly 800 bps. The report argues that technical oversupply and investor preference for shorter maturities have created a dislocation, opening opportunities for tax-sensitive and crossover buyers.

Source: Morgan Stanley, Bloomberg, as of January 31, 2025.

Key Takeaways

Curve steepness: The 5s/30s muni curve spread hit 214 bps, more than double the Treasury curve’s 96 bps.
Forward returns: In past steepening episodes since 2006, long-end munis delivered ~11% average 12-month forward returns.
Rare yields: A recent AAA-rated New York State issue priced at 5.10% equates to an 8.5–11.5% taxable equivalent yield for buyers.
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