This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Finding Bonds to Buy as Interest Rates Rise

By Hal M. Bundrick

NEW YORK (MainStreet) As interest rates creep slowly upward, bond investors get increasingly nervous anxious about the impact of rising rates on fixed income portfolio values. But there is a bond segment to consider in such circumstances: It may be time to go tax free.

Christine Todd, president of Standish Mellon Asset Management says municipal bonds have a yield advantage over Treasuries and are likely to be a fixed income investment that outperforms in 2014.

"Excess yield cushions the impact of gradually rising rates," says Todd, in a municipal bond outlook. "Municipal bonds generally have produced positive total returns, even during periods when the Federal Reserve is tightening monetary policy by raising short-term interest rates."

Must Read: Obama's MyRA Proposal Assessed By Financial Advisors

While munis may offer some resiliency to rates, one risk remains: liquidity. Last year the tax free market suffered substantial redemptions in muni bond mutual funds, triggering forced selling by fund managers. And as financial institutions struggled to comply with new federal regulations, many resisted committing assets to municipal bonds, further reducing the depth of the market's support, the report says.

Still, it's a bit more nuanced.

"Individuals and banks continued to buy municipal bonds during 2013," Todd says. "Individuals and banks historically have demonstrated an appetite for tax-free municipal bonds whenever the yields of these bonds have climbed substantially above the after-tax yield from Treasuries."

New tax free issues have been few and far between over the last three years, but Standish expects to see an increase in municipal bond deals over the long run to feed the need for infrastructure improvements. That would reverse the recent low levels of issuance brought on by austerity programs at the state and local government level. However, Standish expects new issues to support infrastructure will be seen over a longer term, as such programs tend to take several years to complete.

Todd noted that the tax benefits of municipal bonds will continue to appeal to individual investors, especially at tax time.

"As investors begin their 2013 taxes, they are likely to be cognizant of the tax burden on taxable interest income," she says.

However, there continues to be a lack of supply in the tax free market as January issuance of muni bonds continued to lag analyst expectations. Thomson Reuters reports 2014 began with only 587 new issues in January, amounting to $18 billion, down 33% from the period a year ago. January 2013 saw 897 new deals totaling $27 billion.

--Written by Hal M. Bundrick for MainStreet

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.50 -0.26%
FB $118.51 0.79%
GOOG $700.42 1.10%
TSLA $242.05 0.54%
YHOO $36.55 -0.14%


Chart of I:DJI
DOW 17,883.18 +109.54 0.62%
S&P 500 2,080.08 +14.78 0.72%
NASDAQ 4,812.1680 +36.81 0.77%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs