Rise Above Rates

Rising Rates and Municipal Bonds

Municipals’ tax-exempt income stream should become increasingly attractive as interest rates gradually rise.

David Hammer and Erin Leighty explain why in a rising rate environment, municipals should perform relatively well.


Municipals have tended to outperform most other areas of fixed income in rising rate periods, and we think this tightening cycle will be no exception.

  • As Fed policy becomes gradually less accommodative, investors should look for more of their total return from income. The benefit of munis is that the income comes in tax-exempt* form. As rates rise, the after-tax benefit of munis becomes greater.
  • The Fed is still trying to get inflation up to its 2% target. Until we see inflation take off, most long-term assets, including munis, should have somewhat of a limited downside.


*Tax exemption refers to federal taxes. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax. Taxable-equivalent municipal bond returns are determined using an effective rate of 46.77%, incorporating the effect of an average state income tax of 5.58%

More from PIMCO on Rates

Section:
Tag:
Date:
Expert:
Ticker:
Reset All

Rising Rates and Bonds

A short video offering basic education on what the fed funds rate is and how changes in the rate may impact bond investments.

PIMCO’s Outlook for Rates

Even amid a tighter policy environment, interest rates should remain historically low in the years ahead.

Rising Rates: Dispelling the Myth

A reasoned analysis that takes into account historical interest rates, the likely path of rates going forward and the impact of past interest rate rises on returns suggests that rising rates may not be such a threat to bond investors.

The Benefits of Active Management When Rates Are Rising

After nearly seven years of a near zero federal funds rate, investors are concerned about an eventual Fed rate hike and investing in the current environment. We discussed rising rates and the benefits of active management with PIMCO managing director Jim Moore.

Load 6 more results

Disclosures

A word About Risk : All investments are subject to risk and may lose value

Past performance is not a guarantee or a reliable indicator of future results. All references to performance are based on index data as of 30 September 2015. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investors will, at times, incur a tax liability. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. THE NEW NEUTRAL and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Pacific Investment Management Company LLC in the United States and throughout the world. ©2015 PIMCO