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Municipal market: How rates rise matters
With the U.S. Federal Reserve raising rates, concerned investors continue to evaluate their fixed income allocations. Some favor a shorter duration profile due to concerns that bond yields will eventually rise. Others see an opportunity to lengthen portfolios, given attractive relative yields further out along the yield curve. Which approach is right?
- Analysis of five historical periods of increasing fed funds rates shows that various areas of the municipal yield curve responded differently depending on economic conditions, the shape of the curve moving into the tightening cycle and the manner in which the Fed tightened.
- The short end of the curve wasn’t necessarily the least risky, nor was the longest the most volatile.
- A hypothetical investor who remained invested through each of the tightening cycles — regardless of their position on the yield curve — would have experienced positive total returns.
- Since 2008, during times of elevated municipal market volatility, investors who stayed the course would have recovered their principal within 12 months.
1 Data source: Bureau of Economic Analysis
2 Data source: Bureau of Labor Statistics
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A word on risk
IInvesting involves risk; principal loss is possible. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. No representation is made as to an insurer’s ability to meet their commitments.
This information should not replace an investor’s consultation with a financial professional regarding their tax situation. Nuveen is not a tax advisor. Investors should contact a tax advisor regarding the appropriateness of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
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