Most fixed income investors are waiting on a Fed pivot before getting aggressively bullish on long-duration fixed income. Others are studying economic data to see any indications of a slowdown which would presage a pivot and also push bonds higher.

However, they may be missing an opportunity in municipal bonds according to Columbia Investments. These are one way to take advantage of higher yields and the recent selloff in long-duration bonds. Further, they offer unique tax advantages especially when buying debt in your own state and/or municipality. Currently, the average yield for municipal debt is 3.5% which is quite generous considering its after-tax. 

This is above the historical average. Additionally, history shows that default rates are quite low with municipal debt. Finances at the state and local level remain quite solid, and there have been more upgrades than downgrades so far this year, indicating that finances continue to improve. 

This state of affairs is leading to lower supply for municipal debt. Whenever the Fed does decide to pivot, this is a key factor in why municipal debt is likely to outperform as demand will certainly surge. 

Finsum: Given the steep losses in fixed income over the past couple of months, many investors may be overlooking a very unique opportunity in municipal bonds.