Municipal Bonds Post Strong Performance Despite Rising Rates
As investors are wary of rising rates, municipal bonds could provide some comfort. In rising rate environments, munis have historically performed well.
Historically, a surge in municipal bond yields has been followed by a period of strong performance, regardless interest rate policy. Why?
The rise in rates leading to a widening of yield spreads was short-lived. A more dramatic widening of the spread has been caused by either large shocks or black swan events, such as the 2008 financial crisis and, more recently, the onset of the pandemic in 2020.
This is the third rate cycle to occur in the past two decades. The last two were from June 2004 to June 2006 and from October 2015 to February 2019. If you bought municipal stocks at the beginning and held them until the end of the cycle during the first cycle, based on of Bloomberg’s broad indices, investment grade returned 9.91% and high yield 24.12. %; in the second cycle, they returned 9.65% and 20.45% respectively on a cumulative basis.
Historical view of Munis during periods of rising interest rates
|Buy it early in the rate hike cycle Hold all the way to the top|
|GI Munis||HY Munis|
|ROUND 1:||01/06/04 – 30/06/06||9.91||24.12|
|CYCLE 2:||30/10/15 – 28/02/19||9.65||8:45 p.m.|
We are almost certainly in a steep bullish streak as the Federal Reserve (Fed) attempts to bring inflation down. Yields are now at levels not seen since October 2018. Despite the prospect of further action by the Fed to push up short rates, the return to municipal assets rewards investors with the benefit of exempt income and can still generate slightly positive returns until the end of the year. .
ICE US Broad Municipal Index
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There are inherent risks associated with investing in fixed income securities. These may include interest rate, call, credit, market, inflation, government policy or liquidity risk. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed income securities and during periods when prevailing interest rates are low or negative.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar taxable income-earning securities. Certain investors’ income may be subject to Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
Any investment is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that the investment objectives will be achieved and investors may lose money. Diversification does not guarantee a profit or protect against loss in a declining market. Past performance is not indicative of future results.
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