Investment managers at MacKay Shields have identified a significant opportunity in the US municipal bond market. Their municipal investment division, MacKay Municipal Managers, released a report on Monday stating that long-maturity state and local debt presents compelling value for investors.
A Less Crowded Corner of the Market
The report explains that a major segment of the municipal market, known as separately managed accounts (SMAs), typically focuses on shorter-term securities. These SMAs create customized portfolios for retail investors and generally prefer bonds maturing in ten years or less. This common preference creates a structural constraint, leaving the longer-dated portion of the market less crowded.
"The structural constraints of these investment vehicles ultimately cap their ability to extend further," the group stated in its report. "This leaves the most compelling relative value firmly in the hands of flexible, unconstrained managers operating in less crowded portions of the curve."
Attractive Yields in Longer Maturities
This value becomes clear when examining bond yields. As of January 8, the benchmark 10-year AAA municipal bond offered only about 62% of the yield available on similar US Treasury securities. This ratio indicates that shorter-term municipal debt has become relatively expensive, reaching its highest price level since May 2024.
In contrast, bonds with longer maturities appear much cheaper. The report notes that 30-year municipal bonds were offering approximately 85% of the yield on comparable Treasuries. Twenty-year munis were offering about 81%. Specifically, MacKay Municipal Managers finds bonds maturing in 12 to 22 years particularly attractive.
Flexibility Will Be Key in 2026
John Loffredo, co-head of MacKay Municipal Managers, emphasized the importance of investor flexibility in the coming year. "In 2026, where bonds sit on the curve – and whether investors have the flexibility to reach less trafficked segments – will matter as much as the overall direction of interest rates," Loffredo said in a statement accompanying the report.
The analysis suggests that investors who can move beyond the crowded short-term segments of the municipal market may find superior opportunities in longer-dated state and local debt. This strategy could offer better relative value as market dynamics evolve.
