Finding potential advantages in the bond structure of munis

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.