Inflation fears? Extending maturity preference may be a prudent step

In our day to day interactions with our clients, inflation concerns continue to be a prevailing theme.  Intuition would suggest that all the government assistance provided during the current economic turmoil will eventually drive prices higher. 

Despite inflation fears among the masses, some analysts have a differing view and suggest that there are several factors that will prevent the onset of rising inflation.  These factors include strong productivity gains putting downward pressure on unit labor costs, modest consumer spending growth, continued high unemployment, and global overcapacity.  Additionally, the Fed has made it clear that if inflationary pressures begin to surface, they have the policy tools and the authority to take evasive action. 

What to take from all this is that higher inflation in the years ahead should not be a foregone conclusion.  Consequently, with most of the value in municipals further out on the curve, it may be prudent to extend maturity preferences and take advantage of the dramatic pickup in yield.

Current vs historic average municipal bond yield spreads

Current vs historic average municipal bond yield spreads

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Posted in Economic theories, General

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