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Municipal Bond Yield Curve

One thing that makes Municipal Bonds a more interesting investment then what might be assumed is that while they do offer something for nearly all kinds of investors, and even though one of the pillars of Municipal Bonds is the reduction of risk, there are ways to increase yields and maximize investments.

Suppose it is agreed that the most important things about Municipal Bonds are the reduced risk of default and the tax free advantages they offer. But that increased security is of course offset by the relatively low interest rates and slow yields. But when the term yield is used it should be remembered that adding a curve to that, as in the Municipal Bond Yield Curve, the informed investor can use it to make the most of his time, money and efforts.

The yield curve is a tool that represents the relationship between the interest rates a bond pays out and the amount of time before the bond matures.

Most believe this to be a key but simple concept to understand. But the significance of the movement in a yield curve can be complex. Two bonds are actually all that is required to plot a yield curve but the most common are actually based on benchmarks that are determined by institutional investors.

The important reason for this is because of the differences between treasury bonds and municipal bonds. They are two different investments and while some bond traders may know about yield curves for treasury bonds, the yield curves for municipal are more tied to AAA ratings and follow that curve.

Realistically people can invest most their lives into just trying to master the subtle hints to be found in yield curves. However, it is not necessary for the average investors to bury themselves in yield curves as long as they are aware of the basic principles of the benchmarks and spreads and how that relates to making an educated decision on what to buy.

As secure as Municipal Bonds are there are times when they defy conventional wisdom and get out of normal patterns. Those abnormal events in the normal course of bonds historic performance are unsettling to some and raise concerns of default but there is also a possibility that what others fear is actually an opportunity to make an investment that pays well but still offers a safe place to ride out the uncertainty of the market.

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