As interest rates nudge higher, many municipal bond investors worry about the impact on their portfolios. Muni credit, which holds its value better when rates rise, could be the solution.
Lower-rated municipal bonds act as a buffer during periods of rising rates. That’s partly because official rate hikes and the rising yields that accompany them are a response to a strengthening economy. Improving economic conditions can help companies with lower credit quality bolster their revenues and creditworthiness. The securities’ higher income also helps preserve capital better.
Municipal credit has shown its defensive stripes consistently. BBB-rated munis outperformed AAA munis and US Treasuries during the last five Fed-tightening cycles and during the current one as well.
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Article by Alliance Bernstein