What Makes the Municipal Yield Curve Rise?

Abstract

It is well known that municipal yield curves are always upward sloping. The authors provide a straightforward explanation for this phenomenon. Previous researchers have apparently overlooked that the tax-exempt yields under consideration come from bonds callable after 10 years at, or close to, par. The authors show that as long as the yields are based on such callable bonds, the curve will always be upward sloping, regardless of the shape of the underlying optionless yield curve.