Municipal bonds and related exchange traded funds may not be the most exciting asset category, but they have been holding up relatively well in the fixed-income space.
“Muni performance has been nothing to write home about, but it’s been better than just about every other fixed income segment,” Tom Hession, managing partner at Riverbend Capital Advisors, told CNBC.
Munis have been holding up or at least have not done as poorly as other bond asset categories during the current interest rate hike cycle. Year-to-date, the iShares National Muni Bond ETF (NYSEArca: MUB) fell 1.6%, which is still better than similar duration bond ETFs. For instance, the iShares 7-10 Year Treasury Bond ETF (NASDAQ: IEF) decreased 3.6%, iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) dropped 4.8% and iShares Core US Aggregate Bond ETF (NYSEArca: AGG) dipped 2.6% so far this year.
“Munis tend to do relatively well in a rising rate environment,” Hayes said, crediting their higher coupons and callability for insulating against rate increases. “They outperform when rates are rising and underperform when rates are falling.”