Perhaps the greatest disadvantage of passive and laddered portfolios is the lack of active management of maturities. Typically, ladder strategies set bond maturities at 6- or 12-month intervals over 5- or 10-year periods. Proceeds from maturing bonds are reinvested in new bonds added to the long end of the ladder’s maturity structure, regardless of the relative value in that particular area of the curve.
In effect, this laddered or passive portfolio management approach minimizes—if not fully ignores—the duration of each bond in the portfolio and its impact on the portfolio’s average duration. Duration1 provides a measure of interest rate risk exposure, which is continually changing during the life of a bond.
Investment conditions in the municipal market began to change as the Federal Reserve (Fed) began raising interest rates in 2022 to stem inflation, and cut rates beginning in 2025 as inflation ebbed. While active portfolio management adapts when market conditions change, passive laddered approaches can be restrictive in their approach.
Four key changes occurring in the municipal markets over the last five years—increasing and decreasing yields, changing yield curve structures, more credit differentiation, and shifting liquidity conditions—help to highlight the contrast between active and passive approaches.
Higher yields: Absolute yields are higher in 2026 than at any time during the period prior to 2025 (See Figure 1). Higher absolute yields may offer the opportunity to capture higher income across the curve.
We believe yields will remain lower than 2025’s peak but elevated compared with levels earlier in the decade, as the Fed manages interest rate moves lower because inflation remains above its 2 percent target, while unemployment and business activity remain uncertain.
Changes in the shape of the yield curve (See Figure 2): Absolute yield levels and shifting yield curve shapes, as represented by the U.S. Treasury yield curve, also illustrate the changing opportunities presented to active managers of bond portfolios.
The yield curve was inverted during most of the period framed by the onset and decline of the COVID pandemic. With higher yields available to investors at the short and long ends of the curve than in the middle or belly of the curve, active management of yield curve positioning could be relevant.
For example, an inverted yield curve may offer opportunities to capture higher yields through a barbelled maturity structure that overweights holdings on the shorter and longer ends of the curve. In addition, a barbelled structure may provide accelerated reinvestment opportunities (in the form of both purchase/sale swaps and maturities) when rates rise, allowing for a greater ability to potentially build income.
Ladder strategies are generally limited in their ability to implement a barbelled structure due to the nature of their maturity structure and approach. A ladder’s equally weighted maturity schedule often forces purchases into a specific area of the yield curve, which can limit an investor’s response to market opportunities. Conversely, as rates fall or yield curves revert to more historically common upward slopes, a professional manager can assess the various risks to the income stream and structure portfolios accordingly.
Market liquidity and bond issuance: The pace of municipal bond issuance accelerated in 2024, and has remained elevated entering 2026 (See Figure 3). Increased liquidity in the market offers opportunities to find value through trading strategies. In addition, higher bond issuance in the primary market results in secondary market flows and spread widening, which we view as an opportunity. Laddered approaches may unnecessarily confine consideration of new bonds to a limited opportunity set defined by a specific maturity term.
In addition, the rise of electronic trading and the growth of separately managed accounts is helping to further increase liquidity and lower transaction costs. As a result, it may be less expensive to capture the additional income and value opportunities that are available in today’s market that we have described here.
Capturing Income Through Tax-loss Harvesting
We believe tax-loss harvesting (TLH) is one such opportunity important to capturing value in bond investing. TLH, or alternatively tax-loss swapping, involves selling one or more bonds in which an investor has unrealized capital losses and using those harvested losses to offset capital gains and potentially increase the income generated by the portfolio.
If there are remaining losses after offsetting gains (in other words, net losses), an investor may also apply the losses to offset ordinary income. Investors also may be allowed to carry forward for tax purposes in future years additional net losses above this limit.2
Capturing Relative Value Through Credit Differentiation
As the municipal market shifts in response to changing economic, business, and investment market conditions and increased issuance, potential opportunities have increased to capture higher relative value based on credit differentiation across issuers and sectors.
We believe the municipal market enters 2026 with strong but fading credit quality (See Breckinridge’s 2026 Municipal Market Outlook). The technical backdrop is stable. Municipal spreads and Municipal/Treasury (M/T) ratios are at the lower end of their post-2021 range. In 2026, we believe there will be greater differentiation in credit spreads and favor a neutral approach to duration given mixed economic data and Federal Reserve’s dissonant communications on the path for interest rates.
Conclusion
Active portfolio managers, who are generally less constrained across maturity exposures than laddered/passive strategies, may benefit from increasing opportunities in today’s municipal market conditions. Those changes include higher yields, changes in the shape of the yield curve, increased liquidity in the form of higher bond issuance, and greater dimensions of credit differentiation. We believe a passive approach characterized by a buy-and-hold strategy may result in unintended bets on the direction of interest rates. In our view, active management has several advantages that could translate into higher after-tax returns for investors.
[1] A bond’s duration is the weighted average of the length of the periods of times before the bond’s fixed cash flows are received. When the price of an asset is considered as a function of yield, duration also measures and expresses in years the price sensitivity to yield, the rate of change of price with respect to yield, or the percentage change in price for a parallel shift in yields.
[2] Based on 2026 federal tax guidelines, which are subject to change.
BCAI-03192026 (3/26/2026)
DISCLAIMER:
The content is intended for investment professionals and institutional investors.
This material provides general information and should not be construed as a solicitation or offer of services or products or as legal, tax or investment advice. Nothing contained herein should be considered a guide to security selection, asset allocation or portfolio construction.
All information and opinions are generally current as of the dates indicated and are generally subject to change. Breckinridge believes the data provided by unaffiliated third parties to be reliable but investors should conduct their own independent verification prior to use. Some economic and market conditions contained herein have been obtained from published sources and/or prepare generally by third parties, and in certain cases have not been updated through the date hereof.
There is no assurance that any estimate, target, projection or forward-looking statement (collectively, “estimates”) included in this material may be accurate or prove to be profitable; actual results may differ substantially. Breckinridge estimates are based on Breckinridge’s research, analysis and assumptions. Other events that were not considered in formulating such projections could occur and may significantly affect the outcome, returns or performance.
Not all securities or issuers mentioned represent holdings in client portfolios. Some securities have been provided for illustrative purposes only and should not be construed as investment recommendations. Any illustrative engagement or sustainability analysis examples are generally intended to demonstrate Breckinridge’s research and investment process.
Yields and other characteristics are generally metrics that may help investors in valuing a security, portfolio or composite. Yields do not represent performance results but they are generally one of several components that contribute to the return of a security, portfolio or composite. Yields and other characteristics are generally presented gross of advisory fees.
All investments involve risk, including loss of principal. No investment or risk management strategy, including diversification, can guarantee positive results or risk elimination in any market. Periods of elevated market volatility can significantly impact the value of securities. Investors should consult with their advisors to understand how these risks may affect their portfolios and to develop a strategy that aligns with their financial goals and risk tolerances.
Active investing generally involves more risks than laddered strategies because active managers may take on greater market risk to outperform their index. There is no guarantee that either passive or active investing may achieve their objectives. Active strategies also tend to have higher management fees and operating costs than passive strategies. Investors should consider all the differences and risks before making any investment decisions. Active management does not guarantee a profit or protect against a loss.
Past performance is not indicative of future results. Breckinridge makes no assurances, warranties or representations that any strategies described herein may meet their investment objectives or incur any profits. Performance results for Breckinridge’s investment strategies include the reinvestment of interest and any other earnings, but do not reflect any brokerage or trading costs a client would have paid. Results may not reflect the impact that any material market or economic factors would have had on the accounts during the time period. Due to differences in client restrictions, objectives, cash flows, and other such factors, individual client account performance may differ substantially from the performance presented.
Actual client advisory fees may differ from the advisory fee used to calculate net performance results. Client returns may be reduced by the advisory fees and any other expenses incurred in the management of their accounts. For example, an advisory fee of 1 percent compounded over a 10-year period would reduce a 10 percent return to a 9 percent annual return. Additional information on fees can be found in Breckinridge’s Form ADV Part 2A.
Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa.
Separate accounts may not be suitable for all investors.
Tax loss harvesting may generate a higher number of trades in an account due to our attempt to capture losses. This can mean higher overall transaction costs to clients. To the extent that a client's custodian uses a different pricing source, cost basis or tax lot accounting, actual tax efficiencies could be greater or lower than what has been shown. Also, a client may repurchase a bond at a higher or lower price than the price at which the original bond was sold. The replacement bond is subject to price fluctuations. Federal and local tax laws and rates can change at any time; changes to tax laws and rates can impact tax consequences for investors. Further, the Internal Revenue Service (IRS) and other taxing authorities have set certain limitations and restrictions on tax loss harvesting. The tax consequences of Breckinridge’s tax loss strategy may be challenged by the IRS. Investors should consult with their tax professionals regarding tax loss harvesting strategies and associated consequences. The effectiveness of any tax management strategy is largely dependent on each investor's entire tax and investment profile, including investments made outside of Breckinridge's advisory services. As such, there is a risk that the strategy used to reduce the tax liability of the investor is not the most effective for that investor. Breckinridge is not a tax advisor and does not provide tax advice. The tax consequences of Breckinridge’s tax loss strategies may be challenged by the IRS. Federal and local tax laws and regulations are complex and subject to change at any time. These changes can impact tax consequences and investment results. Investors should consult with their tax professionals regarding tax strategies and associated consequences.
Breckinridge believes the data provided by unaffiliated third parties, including rating agencies, to be reliable but investors should conduct their own independent verification prior to use. Some economic and market conditions contained herein have been obtained from published sources and/or prepared by third parties, and in certain cases have not been updated through the date hereof. All information contained herein is subject to revision. Any third-party websites included in the content has been provided for reference only, and does not necessarily indicate an endorsement.
Subscribe to Insights
Sign up to receive curated insights directly in your inbox.
