Worried about rising rates? Don’t take your money out of the municipal market and put it in cash. That could cost you.
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Over the past nearly quarter century, Treasury rates rose more than half a percentage point over a two-month period at a nearly 10% frequency. An increase of more than 0.4% was even more common, at 14%. Unfortunately for investors, it’s hard to predict exactly when those rate rises will occur.
Nonetheless, we compared how an investor who timed a move to cash just right would have done during those periods when the 10-year Treasury yield rose more than 0.4% in two months. At first, the cash investor would have outperformed the investor who had stayed put in either investment-grade or high-yield munis. But within four months of the start of the rate increase, muni investors would have broken even. By six months, on average, munis were beating the cash investor. And by 12 months, they were dominating, at 3.8% and 5.3%, for high-grade and high-yield municipals, respectively, versus 1.8% for cash. The winning tortoise in this race? Municipal bonds.
Simply put, when money sleeps, it stops working for you. As a muni investor, you need your money to work hard. So as rates rise, stay invested and let the power of yield plus time fuel your race.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.
Article by Alliance Bernstein