Municipal Bonds Show Strong Performance Despite Rising Rates
July 05, 2022
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Historically, a spike in municipal bond yields has been followed by a period of strong performance, regardless of interest rate policy. Why?
Rising rates resulting in widening yield spreads have been short lived. A more dramatic spread widening has been caused by either headline 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 over the past two decades. The last two were June 2004 through June 2006 and October 2015 through February 2019. If you bought municipals at the beginning and held until the cycle’s end during the first cycle, based on Bloomberg broad indices, investment grade returned 9.91% and high yield returned 24.12%; during 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 the at Beginning of Rate Hike Cycle Hold Through Peak|
|IG Munis||HY Munis|
|CYCLE 1:||6/1/04 - 6/30/06||9.91||24.12|
|CYCLE 2:||10/30/15 - 2/28/19||9.65||20.45|
Source: VanEck. Past performance is not a guarantee of future results.
We most certainly find ourselves in a pronounced hiking regime, as the Federal Reserve (Fed) attempts to bring down inflation. Yields are now at levels not seen since October of 2018. Despite the prospect of additional Fed action to push short rates higher, re-entry into municipal assets rewards investors with the benefit of exempt income and may yet generate modestly positive returns through year-end.
ICE US Broad Municipal Index
Source: ICE Data Services. As of 5/31/22. Past performance is not a guarantee of future results.
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This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only.
There are inherent risks with fixed income investing. These may include interest rate, call, credit, market, inflation, government policy, or liquidity risks. 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 income-bearing taxable securities. Certain investors' incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
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