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Five Ways Muni Investors Can Navigate a Rising-Rate Environment

Five Ways Muni Investors Can Navigate a Rising-Rate Environment

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

With the Federal Reserve rate rise earlier this month, and expectations of further increases, municipal-bond markets have become more volatile. The Bloomberg Municipal Bond Index is down 46 days out of 57 trading days this year. That hasn’t happened since 2001 when the indexes were first created.

This is not a problem if your bonds are held until maturity and you collect interest along the route. U.S. households are investing more in munis, by purchasing shares of mutual funds and exchange-traded fund shares. These funds are easier to trade and can fluctuate in price depending on market movements.

According to Refinitiv Lipper (the most consistent outflow since March 2020 when the Covid-19 pandemic triggered a free fall of the market), worried investors have pulled $12.9 Billion from municipal-bond funds. Financial advisors say investors are buying inflation-protected Treasurys and moving money into stocks. (Some of the money being withheld is likely to be used to pay taxes.

However, even in a world with rising rates, brokers, investors, advisers and managers said that there are many options for navigating $4 trillion of market for state and local government bonds.

1. Purchase very short-term bonds

Bonds that mature within the next three-years won’t see a drop in price like 10-year bonds. This is because of Fed moves. (Yields rise when prices fall. This is because the bonds will eventually mature and the cash could be reinvested in newly issued, potentially more yielding munis.

Recent trends have shown that the gap between shorter-term and longer-term yields is shrinking. This means that investors aren’t sacrificing as much purchasing shorter-term bonds. Ted Halpern, president and CEO of Halpern Financial in Ashburn, Va., stated in an email that you are not getting any yield benefits by staying out longer. So why take the risk?

Morningstar Direct reports that investors have contributed $11 Million to the Van Eck Short Muni ETF thus far this year, while withdrawing $65 Million from the Van Eck Intermediate Muni ETF.

2. Purchase very long-term bonds

Investors who are patient could also benefit from buying bonds with distant maturity dates, such as 20 years or more. These bonds will lose more value in the coming years than short-term debt. However, they could recover stronger if the Fed lowers inflation and interest rates.

This is an offensive strategy according to Justin Hoogendoorn who is the head of fixed income strategy and analytics at broker HilltopSecurities. It may look like the market is going to be underwater for a while, but you’ll still be ahead of it eventually. You will also find steady demand for long term bonds from certain asset managers like insurance companies which can push up prices.

Morgan Stanley Research

Head of municipal strategy

Michael Zezas

Recently, I suggested purchasing equal amounts of muni bonds maturing less than 4 years and munis maturing more than 20 years.

3. Purchase junkier bonds

Municipal borrowers have enjoyed a boom in their finances thanks to a stimulus-fueled economy and federal Covid-19 aid to local and state governments. In the short-term, however, worries about repayment difficulties will not cause prices to drop on most bonds. Investors may find it attractive to purchase lower-rated, but higher-yielding municipal debt to protect themselves against rising rates.


Do you believe it is a good time for municipal bonds to be purchased? Why or why? Join the conversation.

This is because any change to interest rates will lessen the value of a coupon bond with a higher interest than it would a bond with a lower maturity date. According to Refinitiv Lipper, high-yield funds saw inflows during the week ending Wednesday after more than a month’s worth of outflows.

However, bondholders should be aware that the high yield market is more volatile than high grade muni bonds. Many advisors caution against chasing yield with junk bonds.

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Matt Fabian, a partner with Municipal Market Analytics, stated that the ride could get more difficult.

4. Reduce your next year’s tax bill by selling

Investors turn to munis because they offer lower tax costs. Bonds typically pay interest that is exempted from federal and sometimes state taxes. Falling muni prices by 2022 offer another way to reduce tax bills. This is known as tax loss harvesting. This is something that has been difficult to do in recent years, as muni prices have risen.

To reduce the April tax bill, you will need to sell investments that have lost value. (Investors often buy a similar bond as the one being sold to preserve their portfolio.

It is a way to make lemonade out lemons! Brian Cohen, an investment advisor with Melville, N.Y.-based Landmark Wealth Management said it in an email.

5. Don’t try to time the market

Yes, muni bonds bought today can easily lose value as interest rates rise and expectations shift for higher rates. These bonds will still have higher coupons than any other debt issued in the past few years. It might make sense to wait for a few months or weeks before you start thinking about what the future holds. Investors who wait to get the best deal may end up missing out.

Mikhail Foux (head of municipal strategy at) said that no one knows how to pick the absolute bottom.

Barclays PLC.

Write to Heather Gillers at

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