Understanding the Yield Curve and its Impact on Mortgage and Muni Bonds

The current yield curve is showing an inversion in the back part of the market. By making a simple twist to the curve, the option value of a three-year call option on a 10-year treasury goes down by almost two points. This indicates that mortgage bonds will go up by two points in the next year and change. Buying mortgage bonds is a good way to bet on the yield curve steepening. The Fed has created a great investment opportunity. The same opportunity exists in the muni bond market with callable securities.