How Rising Interest Will Effect Muni Rates & Bond Values

Muni rates have benefited as the bond market has enjoyed some popularity recently, but when interest rates inevitably go up, will the bond market still enjoy its resurgence? While bonds are still being widely issued and bought in the face of a nation-wide debt crisis, rising rates could cause serious problems. Bond values go down when market yields go up, and in our current debt climate, many feel the risk of defaults could become a significantly greater risk when this should occur.

Appreciating Domestic Bond Values

It’s too soon to tell what rising muni rates can mean right now, but despite looming fears of wide scale defaults destroying the market, sales were strong over the past year, and March 2010 may have actually seen record numbers of bonds being purchased. Further continuing the rising trend for this month, investors have shown great partiality to California, buying up just under $6 billion in G.O. bonds in the first half of April alone -- this despite the piling deficits the state is currently facing. This is because, to American investors, a struggling state like California appears to be a far less risky prospect than investing overseas, as the American municipal bond market has been more viable than Europe’s with more alluring muni rates and lower prices yielding greater bond values; therefore, American investors aren’t exactly rushing out to invest in the wake of Greece’s economic woes with overly high yields and perceived risk.

So with the American economy, along with the dollar, gradually starting to rebound, what does the near future hold for bond values and muni rates?  

What to Do When Muni Rates Increase

On Wednesday, April 14, 2010, interest rates started to rise in the bond market, and many feel conditions may start to worsen before they get better. The alarm bells may start to ring in the event of continually rising rates, but time has shown that while bond values fluctuate with interest rates, conditions do eventually even out over time. In the meantime, one should look to essential service revenue bonds and stay away from long-term munies with poor muni rates, which are more sensitive to fluctuating yields. As it may become increasingly difficult to sell muni bonds, what many are advising is to buy a bond with the intent of holding to maturity. Regardless of what’s to happen in the market, those who make smart, safe investing choices will continue to profit.