Interest Rate Reality

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

A funny thing is happening to interest rates.

While the majority of economists and Wall Street pundits have relentlessly trumpeted their predictions of a “rising interest rate environment,” long-term interest rates have actually plummeted.

In November 2017, we cautioned investors that the Fed, raising short-term rates would actually bring down long-term rates and cause the yield curve to flatten (“What Muni Investors Should Know About the new Fed Head”), and more investors are recognizing this interest rate reality.

Although long-term muni rates have declined along with Treasury bond yields, they still provide better after-tax returns than any comparable quality, fixed-income investment.

Interest Rate Reality

Other investors recognize interest rate reality

It is no wonder that the municipal bond market is attracting some strange bedfellows, such as foreign investors and equity investors fleeing their stock mutual funds, seeking a safe haven and appealing returns with less risk and volatility.

It is also no surprise foreign investors are flocking to munis as most sovereign European bonds are actually trading with negative yields.

Just yesterday, German unemployment figures rose for the first time since 2013. Germany, which has always been considered the industrial engine of the European Union, announced that more than 60,000 people were newly unemployed, while the economists surveyed predicted a decline of 8,000.

This may or may not be a one-off statistical month, but there seems to be no doubt the global economy is weakening.

Fortunately, our long-time clients understand they can’t predict future economic developments and the attempt to forecast future interest rate changes is a fruitless exercise.

As our clients and friends know, FMSbonds has always encouraged investors to deploy their capital when investable funds are available. Look first for appropriate quality, then focus on yield.

Above all, keep your interest-rate clock ticking.

James A. Klotz is the President of FMSbonds, Inc.
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May 30, 2019

Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.