Fixed Income
This “primer” on Municipal Bonds is part of our education series for fixed income investors. In this first edition publication, we cover several concepts key to understanding the basics and some peculiar issues found only with municipal fixed income investing.
As the economy reopens, we believe growth is set to surge. The United States is well along the path on vaccination, which is unleashing months of pent-up demand. Meanwhile, other parts of the world are lagging in vaccinations and confronted with potential challenges, including a stronger dollar. Given continued signs of progress and growth in the United States, we refocus tactically around domestic and high-quality assets. We also maintain a tactical overweight to equity over bonds, given incoming data as we enter the third quarter.
Is there a way for bond investors to win if interest rates rise? We think laddering bonds is one way to navigate an uncertain and changing environment. First, we must start with a simple fact. Nobody knows for sure what will happen to interest rates in the future. There are potential ranges of plausible outcomes, but in reality, the future direction of interest rates is unknowable. What is knowable is today’s level of interest rates. So, an investor interested in knowing the nominal dollar return of a T-bill or zero-coupon U.S. Treasury can know that future return with certainty today….
Interest rates on bonds are at very low levels. The decline in the United States rates follows those of other sovereigns like Germany, the United Kingdom, and Japan (Chart A, below). In turn, global rates are following a long-established, declining secular trend. That trend leads to “negative” rates with more than $17 trillion in such debt circulating globally (Chart B, below). The defeating of inflation and worries of deflation may be behind this trend. Still, other factors may also be at work. Chart A U.S. Long-Term Treasury Yields vs. Average Foreign Yield (Germany, United Kingdom, Japan) Chart B Aggregate Global…
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