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Financial Industry Insights from Advisors Asset Management
On April 23, 2012
Rising Rates? Why Municipal Bonds May Weather the Storm
A rising interest rate environment over the next few years is an investment scenario to which many investors now subscribe. The prospect of rising rates often prompts investors to think along the following lines: “Interest rates are going rise and that’s bad for bonds, so I’ve got to cut back or stay away completely.” But what if we suggested that investment grade, intermediate municipal bonds (“muni’s”) might weather a rising rate storm comparatively well? We can’t issue guarantees on such a scenario, of course, but we do believe there are a number of factors worth considering that could help municipal bonds lessen the negative impact of generally rising interest rates.
Consider the following forces currently working or likely to appear in the near future:
We agree that a trend of higher interest rates over the next few years appears likely. If that occurs, we don’t suggest that investing in muni’s will reverse the laws of bond mathematics. But our first impulse when we hear investors voice the “interest rate are rising/ bonds are bad” line is to think, “Which rates are you talking about and what part of the bond market are you invested in?” We suggest digging deeper when thinking about the prospect of higher rates. We believe that the combination of muni-specific factors listed above may work together to help counteract, in some degree, the forces pushing rates higher. We suggest that investment grade, intermediate municipal bonds may behave comparatively well among fixed income sectors in a challenging bond environment.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.
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