Municipal performance during periods of rising rates

Municipal performance during periods of rising rates

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

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.


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 February 2022, 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.

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. This includes 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.

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.

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.

The Bloomberg 3-15 Year Blend Municipal Bond Index measures the total return performance of investment grade, US tax-exempt bonds with maturities from 2 to 17 years.

The Bloomberg High-Yield Municipal Bond Index is composed of US dollar-denominated, non-investment-grade, tax-exempt bonds for which the middle rating among Moody’s Investors Service, Inc., Fitch, Inc., and Standard & Poor’s is Ba1/BB+/BB+ or below.