Data Source: Bloomberg, L.P., 31 Dec 2022. Performance data shown represents past performance and does not predict or guarantee future results. Fed pause dates: 31 Aug 1984, 28 Feb 1989, 28 Feb 1995, 28 Apr 2000, 30 Jun 2006 and 31 Dec 2018. Index returns included reinvestment of income and do not reflect investment advisory and/or other fees that would reduce performance in an actual client account.
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The Fed hiked interest rates another 25 basis points in May but omitted a key phrase from its post-meeting statement that was included in its previous statement: “some additional policy firming may be appropriate.” Is it possible policymakers may soon pause? We’ll find out in June when they meet again.
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If the Fed does hit the brakes, muni bond returns could accelerate. This asset class has a history of delivering significantly improved returns in the six months following a pause in rate hikes, as illustrated in the above chart.
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A Fed pause doesn’t mean a pivot will soon follow. History has shown it can take 9 to 12 months before rate hikes impact inflation. During this time, markets could be volatile. Although muni bonds aren’t immune to volatility, they generally outperform equities during volatile periods.
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Pause or no pause, we believe strong credit fundamentals, low default rates, a steeper municipal yield curve, and attractive long-term valuations bode well for munis through the remainder of the year.
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Regardless of when you invest, muni bond interest is exempt from federal income tax. In some cases, it is also exempt from state and local taxes, providing investors income-generating potential and peace of mind.
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Bond portfolios managed by Riverbend Capital are conservative, well-positioned for potential volatility, and generate steady, predictable tax-free income. We believe that our approach to this allocation can help balance risk and provide stability amid uncertainty.