A Fed pause may signal an opportunity for municipal bond investors

A Fed pause may signal an opportunity for municipal bond investors

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

Chart 1

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.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

The views expressed represent the investment team’s assessment of the market environment as of May 2023, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

Investments may not receive payment of principal, interest, and other amounts due in connection with bank loans and other direct indebtedness because they primarily depend on the financial conditions of the borrower and lending institution.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt. The Fund may also be subject to prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity, at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.

Charts shown throughout are for illustrative purposes only and not meant to predict actual results.

Chart is for illustrative purposes and is not representative of the performance of any specific investment.

The Bloomberg Municipal Bond Index measures the total return performance of the long-term, investment grade tax-exempt bond market.

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

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