Municipals and Rising Rates: A Potential Opportunity for Global Fixed Income Investors

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Municipals and Rising Rates

Christine Todd, CFA

Christine Todd, CFA - President of Standish and Head of the Tax-Sensitive and Insurance Strategies

Executive Summary

  • For investors concerned about the prospect of rising interest rates, US municipal bonds may be a good opportunity
  • U.S. municipal bonds can be a high quality, low volatility complement to an overall asset allocation
  • The diversification benefits of US municipal bonds may enhance the overall risk-and-return profile of an investment portfolio

This year, the US Federal Reserve (Fed) is likely to raise interest rates at least two and perhaps as many as three times. The current rate hike cycle is the first in nearly a decade and after all those years of zero-bound rate policy, it may feel like a step into uncharted territory. Standish, however, has managed municipal-bond portfolios through many similar interest rate tightening cycles and our analysis of how various asset classes have performed during previous periods of rising rates makes us confident that opportunities will exist for investors to potentially earn attractive yields, while also reducing portfolio risk amid the ongoing normalization of monetary policy. We expect the current tightening cycle to be steady and gradual, likely playing out in a series of modest hikes until rates reach 3%.

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