The New Interest Rate Cycle and the Case for Muni Bonds

While it feels like the current interest rate correction might have further to go there is a quite a lot of bad news priced already and those who shortened their duration or stepped away and are lucky enough to have some dry powder to deploy are eyeing up the choices for when the time is right. Those looking might be attracted by some allocation towards the municipal market.

A combination of rising interest rates and a weakening economy are at the top of the current fixed income agenda, especially in the US, where the Fed is projected to raise rates by 25bps at each of its remaining meetings in 2022. The uncertainty seems to warrant some degree of caution. Munis offer better returns than treasuries, but still have defensive characteristics relative to credit where higher yields might prompt credit deterioration.

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