May 22, 2023
US Federal Reserve Chair Jerome Powell suggested that the Fed might pause additional interest rate increases when he announced its latest hike of 0.25 percentage points on May 3, 2023. With the possibility of this suspension in mind, we examined how the municipal bond market has performed historically following such a pause. For a majority of previous rate hike cycles, municipal bonds delivered stronger results in the six months following a pause than in the six months leading up to it, according to data from the Bloomberg Municipal Bond Index.
Bloomberg Municipal Bond Index total returns (%) before and after Fed pauses
Source: Morningstar.
Fed pause dates: August 31, 1984; February 28, 1989; February 28, 1995; April 28, 2000; June 30, 2006;
December 31, 2018.
What this means for investors
Right now, we believe investors have a timely opportunity to get ahead of the pause and consider a municipal bond allocation. In addition, an actively managed portfolio may provide even greater yield and return potential.
While there is no guarantee that the results will be similar this time around, we have already started to see the market normalize, with municipal bonds posting positive performance year to date. Fundamentally, municipal credit is as strong as it has been in decades.
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