Rising Interest and Muni Rates Don’t Deter Municipal Bond Market
Rising Interest and Muni Rates
Muni rates are set to rise now that the prevailing interest rates are steadily moving up. While the Federal Reserve had been able to control interest rates, which fell near record lows by way of the Obama administration’s initiatives that were employed to stimulate the housing market and jump start home buying, the plug has since been pulled and ideal mortgage rates below 5% aren’t quite as attainable as they’d been earlier on in 2010.
While Interest rates are indeed rising, and muni rates are following in tow, as of Wednesday April 28, 2010, municipal bond prices are also dropping in the process. This is likely come as no surprise to most investors who know that bond pricing typically moves inversely to prevailing interest rates.
However, the rising muni rates and falling municipal bond prices may be tempered by way of the wide perception that the economy is starting to improve.
How the Fed Achieved Record Low Rates
The Federal Reserve had initially helped to rebound the economy and achieve the recent record low rates by buying up billions in mortgage backed securities, and while they’ve since ceased this process, the Fed is still claiming they are committed to maintaining interest rates at near historical lows in order to encourage spending and further boost the economy.
The Municipal Bond Market Remains Strong
The municipal bond market continues to look bullish even though there had been much panic and concern over the risk of widespread defaults due to high deficits; however, this hasn’t stopped investors from trading in an environment of low interest and low muni rates.
In fact, in the current atmosphere of growing economic confidence, investors are becoming more daring -- setting out to find the fatter yields. Mutual fund pools are generally looking dry while municipal bond investors are now looking for high risk, high return investments.
Even California, in spite of massive debt woes, is now sustaining solid municipal bond sales. This, after Moody’s and Fitch had recalibrated their assessment ratings, upgrading the state’s general obligations bonds from BBB to A1 over night. While state officials have long been demanding this to happen, one should still be wary of the major rating agencies, which are operating in the same self-serving “business as usual” manner that helped to spur the global financial crisis.
Investors who are still placing value in these ratings need to play it smarter and look to muni rates, pricing and yields for proper bond risk assessment.