As Interest Rates Rise, Muni Bonds Offer a Unique Opportunity To Investors
The Federal Reserve (the Fed) is expected to raise short-term interest rates several more times this year. As the Fed tightens monetary policy, investor concerns about their municipal bond investments may also be on the rise. Importantly, our seasoned Municipal Bond team has a history of managing portfolios through similar cycles. Historical analysis of municipal bond behavior relative to U.S. Treasuries in rising rate environments points to potential opportunity for attractive tax-exempt yields without the volatility commonly associated with Treasuries.
Muni Bond Behavior During Previous Rate Hike Cycles
Municipal bonds have delivered higher returns and lower volatility than Treasuries of comparable maturities during the three most recent periods of rising rates. Between January 1994 and February 1995, the federal funds rate rose 300 basis points (bps). The Fed raised rates by 175 bps from June 1999 through May 2000 and again by 425 bps, in a series of 17 rate hikes of 25 bps each, between June 2004 and June 2006. We expect the current tightening cycle will be steady and gradual, likely resulting in four hikes in 2018 and two or three hikes in 2019 until rates reach 3% to 3.25%.