Wednesday, September 28, 2011

Muni Madness

Via FRED, the Bond Buyer Index GO 20y to maturity, mixed quality) spread to treasuries (weekly)
I've made no secret that I have been a heavy buyer of long-term municipal credit risk, taxable and non (via Build America Bonds) with short in treasuries of similar maturity to isolate the spread, looking for compression. But, please, take a look at the big 2008 spike. At these levels DV01s are big, so that widening can be really painful. Do yourself a favor and watch your risk levels. While there's reasons (scroll down to TOB section if you must) why I, personally, don't expect a 2008-like event, I am ready for it. This goes double if you think you are going to boost your positive carry and grab extra return from a wide discount in CEFs, as illustrated below.

Discount / premium of MQT via CEF Connect

UPDATE-1: Going back to 1953 using the monthly 20y treasury series with the long-term average series for the gap (pretty good fit, actually)

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