Imagine you could make a time-jump a few years out into the future. What might you expect to be different? You’d know what the iPhone 7 looks like. You’d know whether the Ravens and Niners had a rematch, and who won. You’d also know the level of interest rates after the Fed winds down its bond-buying program.

While nothing is certain, most investors assume that interest rates will be higher in a few years. Accordingly, they are keeping their bond portfolios in short-duration securities in the expectation that higher yielding bonds will be available later. But…what if rates don’t go up as much as expected? Then today’s low-yielding short bonds will roll over into more lower-yielding bonds and the investor is regretting his/her decision.

But, my friends, it is possible to buy tomorrow’s higher-yielding bonds today. This is true even if rates don’t actually rise in the future! At this writing, the benchmark 10-year US Treasury is yielding 2.70%. While that is above the rate of inflation, few people think inflation will stay this low for very long. A more “normal” rate of inflation is twice today’s level, and a more “normal” 10-year Treasury rate is closer to 5% than 3%. A 5% Treasury would compensate risk-avoiding investors with enough after-tax yield — about 2.75% for a high-bracket Californian — and at least break even with inflation. So…how to buy that 5% bond today, rather than wait several years to see what happens?

The solution: High-grade municipal bonds.

A 10-year municipal bond can be bought today for around 4.0%. Before you pull the “bankruptcy risk” objection out of your analysis toolkit, let me say that, for reasons beyond the scope of this blog, certain types of bonds have zero bankruptcy risk, even if the issuer goes bankrupt.

As we pointed out above, we need to earn 2.75% or so after tax some time in the future to make up for the fact that we expect rates to go higher. But…we can earn 4.0% after tax right now. It’s like investing with a time machine. We can earn yields right now that create the equivalent of owning a 10-year Treasury yielding over 7%! The current Treasury rate of 2.70% could more than double, and we are still ahead of the game by buying muni bonds today. A added bonus…we get our higher yield even if Treasury rates don’t rise.

We understand that clients and friends are worried about rising rates. We share those worries. Yet the markets are providing us the opportunity to invest today as if our worst fears about tomorrow come true. We’re taking the opportunity.