- Muni bonds have offered resilience during recent periods of rising interest rates.
- The correlation between munis and U.S. stocks has been low, about 0.1 during the 10 years through July 2017, offering a source of diversification.
- Managed muni bond funds can benefit from in-depth credit analysis and also from the consideration of liquidity.
Many investors understand municipal bonds can be a source of tax-advantaged income, but that’s just one reason to consider them for client portfolios. Clients looking for investments offering relatively resilient returns in times of rising interest rates, relative value opportunities, or diversification from equity exposures might be well served with munis.
In today’s muni market, credit risk is a primary driver of bond valuations, and buying and selling bonds can be costly and difficult for smaller investors. A research-driven approach to investing can, therefore, add value. With all that in mind, here are five reasons to consider investing in munis:
1. Potential Resilence Around Periods of Rising Rates
Since bond prices move inversely to yields, many investors are concerned by the prospect of rising interest rates. However, history offers food for thought. For example, in two recent periods when the Federal Reserve raised the federal funds rate and five-year Treasury yields rose more than two percentage points, the muni market recorded positive returns from the start of each period through one year after the period ended. It’s also important to remember that rising yields may actually benefit managed muni bond funds — enabling reinvestment in issues offering higher income and, therefore, possibly greater longer term potential returns.