Muni investors can navigate an environment at a higher rate in five ways

Investors who check the value of municipal bond portfolios are receiving bad news.

With the Federal Reserve rate hike at the beginning of the month and the expectation of further increases, municipal bond prices have been fluctuating, and the Bloomberg Municipal Bond Index has fallen 46 out of 57 trading days this year. Prior to 2022, this has not been the case since the index was created in 2001.

That’s not a problem if you keep the bonds until maturity, if you collect interest along the way. But U.S. households are investing more and more in buying shares of mutual funds and exchange-traded funds that are easier to trade and can rise and fall in value depending on market movements.

Concerned investors have pulled $ 12.9 billion out of municipal bond funds since the beginning of the year, according to Refinitiv Lipper, the longest-running outflow since the Covid-19 pandemic sent the market into a free fall in March 2020. Investors are taking money into stocks and buying inflation-protected treasuries, financial advisers said. (A portion of the money withdrawn is also likely to pay tax bills).

But even in a world where rates are rising, investors, advisors, managers and brokers say there are plenty of opportunities to navigate the $ 4 trillion in state and local government bonds in the market.

1. Buy very short term bonds

Short-term bonds, for example, for the next three years, will not fall in price as 10-year bonds respond to Fed moves. (Yields rise as prices fall). Therefore, it will not be long before these bonds arrive and the cash is newly issued so that it can potentially be reinvested in higher-yielding munitions.

The gap between short-term and longer-term returns has narrowed recently, with investors not so reluctant to buy short-term bonds. “You don’t really benefit from going out on the street,” Ted Halpern, president of Halbern Financial in Vah, Ashburn, said in an email. “So why take the risk?”

Investors have added $ 11 million to Van Eck Short Muni ETF so far this year, $ 65 million to Van Eck Intermediate Muni ETF, according to Morningstar Direct.

2. Buy very long-term bonds

Buying remote maturity bonds, say 20 years or more, can also be useful for patient investors. These bonds are likely to lose more value in the coming years than short-term debt, but they could bounce back stronger if the Fed lowers inflation and interest rates.

“This is a kind of offensive strategy,” said Justin Hoogendoorn, head of fixed income strategy and analysis at the HilltopSecurities broker dealer. “Even though it looks like it could be underwater for a while, you’ll eventually be ahead of the game.” In addition, there is a constant demand for long-term bonds from some asset managers, such as insurance companies, which contributes to rising prices.

Morgan Stanley Research’s head of municipal strategy, Michael Zezas, recently proposed buying the same number of munitions with a maturity of less than four years and buying more of the 20-year maturing bonds.

3. Buy junkier bonds

Stimulus-driven economic booms and Covid-19 federal aid to state and local governments have boosted the finances of municipal borrowers. This means that concerns about amortization issues will not lower prices on most bonds, at least in the short term. Buying low-priced and higher-yielding muni debts can be an attractive way for investors to isolate themselves from the impact of the rate hike.


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That is, any change in interest rates will erode the value of a higher coupon bond less than the value of a lower interest rate with the same maturity date. The high-yield funds had entries in the week ending Wednesday, after a more than month-long outflow, according to Refinitiv Lipper.

However, holders of daring bonds in the high-yield market should be aware that it is more volatile than high-value municipal bonds, and many advisors are wary of looking for a return on junk bonds.

“The ride can be rougher, maybe a lot rougher,” said Matt Fabian, a partner at Municipal Market Analytics.

4. Sell and lower next year’s tax bill

Reducing tax costs is often the main reason investors turn to munitions, as bonds typically pay interest that is exempt from federal and often state taxes. The fall in municipal prices in 2022 offers another way to reduce tax bills, known as “collecting tax losses”, which have been difficult to do in recent years as rising municipal prices.

This means selling an investment that has fallen in value to record a loss and counting the profits recorded during 2022, the ultimate goal being to reduce the tax bill next April. (Investors usually buy a bond similar to the one they sold to keep their portfolio intact.)

“It’s a way to make lemonade with lemons!” Brian Cohen, an investment adviser at Landmark Wealth Management in Melville, NY, said in an email.

5. Stop trying to put the market on time

Yes, any currency purchased today can easily fall in value as rates rise and expectations for further increases change. But these bonds will still have higher coupons than almost any debt in recent years. Sitting next to it can make sense for weeks or months. But investors who hold on to the best bargain will miss out on the opportunity.

“In the end, no one knows how to take the bottom line,” said Mikhail Foux, head of municipal strategy at Barclays PLC..

Write to Heather Gillers at

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Muni investors can navigate an environment at a higher rate in five ways

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