A smart reinvestment today is in intermediate-term bonds, which offer expected total returns similar to those of long-term callable bonds when you consider both yield and price return from roll.
Roll for intermediate-maturity bonds is worth 1.7 percent today. Together with yield, the expected return of an intermediate bond is 3.7 percent-essentially the same as the yield of a long-term callable bond. Furthermore, in selling the long-term bond and reinvesting the proceeds in an intermediate-term bond, the investor has reduced his interest-rate risk.
Investors want consistent income and stability from their bond portfolios. By actively redeploying some long-term municipal bonds and navigating to a more attractive part of the yield curve, we believe investors may be able to achieve similar returns and increase the stability of their portfolio.
Guy Davidson is director of municipal investments at AllianceBernstein.