• A prolonged low interest rate environment in the 2010s led to the creation of a diverse coupon stack in the municipal bond market. This included 2%, 3%, and 4% coupon bonds—a new phenomenon for a market that for years had issued predominantly 5% coupon bonds.
• In 2022—a year in which the Fed aggressively raised rates to combat inflation—many of these lower-coupon callable municipal bonds experienced price declines as the impact of negative convexity emerged.
• Active managers who are navigating this higher rate environment benefit from understanding how to prudently manage negative convexity risk. The diversity of the current coupon stack provides a historically unique lever for actively managing convexity risk. 

Read the research paper in its entirety here.