February 21, 2022
During periods of rising rates, investors who stayed the course through the tightening cycle may have likely experienced positive total returns. When looking back at the past three conventional tightening cycles, the municipal bond market represented by the Bloomberg Municipal Bond Index generated positive returns for every period. The performance for an intermediate municipal index and a high-yield municipal index are also included in the chart, both showing positive performance as well. Their inception dates came after the 1994-1995 period.
Performance during periods of rising rates
Source: Morningstar Direct.
Chart is for illustrative purposes only.
Since the markets tend to front run Fed moves and the impact of the last hike is generally felt on a lag, the performance shown in the chart captures the three months prior to the first rate hike through three months after the last rate hike for each rising rate period.
What this means for investors
While positive technicals and improving fundamentals have led to strong returns in the past two years, this year began with lower yields and compressed spreads amid increasing concerns over rising rates. Inflation concerns have shifted the Federal Reserve to a hawkish stance. Do potentially higher rates mean municipal investors are looking at negative returns? The experience during the most recent rate hike cycles could provide some insight into this question. Proper portfolio positioning using deep credit analysis and active management could benefit investors looking to navigate the volatility that is likely to accompany a rising rate environment.