Rising Rates: What All Muni Investors Should Know

Rising Rates: What All Muni Investors Should Know

What shouldn’t you do as the Federal Reserve tightens policy? You shouldn’t be passive. Passive muni investors suffer from the painful phenomenon of clipped wings. That’s when passive strategies can’t rapidly reinvest in higher-yielding securities as rates climb, unlike their more nimble, actively investing cousins.

We’ve shown the vicious effects of passive investment on investor returns.


Greenhaven Road Capital 3Q22 Commentary

chart 1663692248Greenhaven Road Capital commentary for the third quarter ended September 30, 2022. Q3 2022 hedge fund letters, conferences and more Dear Fellow Investors, The Fund is enduring its worst drawdown since inception. We were down again in the third quarter, bringing year -to-date returns to approximately -59%. Returns vary by . . . SORRY! This Read More

Also read:

  •  Fund of funds Business Keeps Dying
  • Baupost Letter Points To Concern Over Risk Parity, Systematic Strategies During Crisis
  • AI Hedge Fund Robots Beating Their Human Masters

And now we know when passive investing hurts most: Always. Because in every kind of yield-curve environment, from steep to inverted, as rates fall and as they rise, passive investors are leaving significant money on the table. So while it matters that rates may rise today, it doesn’t change the answer to the question investors keep asking us: passive, or active?

If you care about your bottom line, active simply steals the show.

Here’s another bonus for the active muni investor. As we explained last week, rising rates eventually lead to slower growth. This causes long-term Treasury and AAA municipal yields to fall faster than short-term yields rise, resulting in flatter yield curves. As curves flatten, Treasuries and high-quality municipals start to beat lower-quality credits. One of the most prudent steps muni bond investors can take during this time is to lean into Treasuries and higher-quality munis.

An actively managed tax-aware municipal bond strategy, which will make the shift and adjust the balance according to an investor’s tax rate and the relative after-tax yields of Treasuries and municipals, can be an effective way to do that.

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

No posts to display