Putting it all together: Interest rates are at historically low levels and will have to rise. But the amount of that rise is likely to be limited. In fact, headwinds for employment growth and no clear catalyst for rising inflation are likely to keep interest rates subdued for a while. The Fed itself has alluded to a relatively gentle rate-hiking cycle with the peak for the target federal funds rate likely to be below the long-term average.
How long could “gentle rates” last? It’s hard (impossible really) to say. Until jobs and wealth shift to millennials, economic growth (and rates) is likely to remain subdued. By some estimates, however, millennials already outnumber boomers and gen Xers, so when they hit their earning/spending/consuming stride … the impact could be big.
For muni investors, that means the longer end of the curve should remain the place to be for incremental yield pick-up for the foreseeable future. Although longer maturities have gotten expensive recently, after the market’s stellar 2014 run, they should continue to represent long-term value for traditional muni bond investors.
Peter Hayes, Managing Director, is head of BlackRock’s Municipal Bonds Group and a regular contributor to The Blog. You can find more of his posts here.
Sources: BlackRock, S&P Municipal Bond Index, U.S. Census, EBRI