As longer-dated muni yields approach 5%, some high-quality 5% coupon bonds are trading at par, or even at a discount, creating a rare opportunity for investors, analysts said.
Long-end market conditions are currently attractive, "a function of a smaller buying audience (relying on institutional and crossover accounts) and aligning with the long UST bond on a relative value basis," said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
At the end of July, the 30-year MMD-UST ratio was 85%. The level is now at 91%.
And the current environment offers a "relatively rare opportunity to purchase long-dated 5% AA-or-better-rated bonds at a discount," J.P. Morgan strategists said.
The tax equivalent yield on 30-year AA munis for top-bracket joint filers stood at 8.67% Thursday, higher than any comparable monthly average since November 2000, they said.
Bonds have traded at a discount a few times over the past several years, but shorter call structures historically have gotten there first, meaning short call structures have widened relative to longer call structures of the same maturity to "sort of discount the asymmetry in your price profile or the negative convexity of your structure," said Adam Congdon, director at Payden & Rygel.
In this instance, higher yields for longer-dated munis — last week's two-day selloff pushed the 10-year muni to its highest levels since the post-Liberation Day selloff in April 2025 and the 30-year muni to its highest level since February 2011 — have meant some high-quality 5s on the long end are likely to begin trading at discounts, Barclays strategists said.
At the end of July, general market (AA-rated) 5% coupons due past 25 years were trading around 4.60% and widened to the 4.70% area at the end of August. The selloff in pure yield terms has pushed those levels into a discount, Olsan said.
For instance, the Magnolia Independent School District (PSF/Aa2 underlying) came mid-July with 5s in 2055 yielding 4.79%. The bond traded last week at 5.06%, she said.
Some market participants think longer-dated bonds need to trade at a discount for rates to move higher.
On the long end, high-quality 5s could start trading at a discount if rates move 20 to 30 basis points higher, said Jeremy Holtz, portfolio manager at IR+M.
If long-end yields in the muni market sustain near 5%, or a bit higher, couponing will adjust, with more 5.5% coupons or even 6% coupons printed, he said.
Issuers will adjust couponing based on overall yield levels, but the discount for high-quality bonds will be most pronounced, given where yields are on the long end of the curve, particularly in 30 years, Holtz said.
Long high-grade munis trading near 5% appeal to retail and institutional buyers alike, drawing interest from retail accounts and mutual funds/exchange-traded funds looking to take advantage, said Matt Norton, chief investment officer for municipal bonds at AllianceBernstein.
"When you see long high-quality munis trade close to 5%, traditionally that's been a pretty good buying opportunity," he said.
