Municipal bond investors who fear interest rate risk should keep this figure in mind: $14 trillion.
That’s the amount of global debt currently being held that has a negative yield. In other words, investors around the world are paying institutions for the privilege of holding their money.
Interest rate risk is misplaced
For those investors reluctant to add to their municipal bond holdings and fear interest rate risk, this negative yield environment should prompt second thoughts. Their concern – that interest rates will make a sudden U-turn and rise steeply – seems badly out of step with reality.
In the U.S., the Fed signaled its outlook on the economy by cutting the benchmark rate twice already this year. Once in July – the first in more than a decade – and again last month, and it’s considering two more cuts in 2019.
The Fed sees what’s obvious to average investors: Persistent trade battles, a slowdown in manufacturing and a drop-off in hiring and investment.
There’s also the inverted yield curve, which generally presages an economic downturn (“Muni Strategy Amid the Inverted Yield Curve”).
Overseas, signs are even more ominous. The major economies of China and India are slowing. Japan’s exports are down for 10 straight months and Europe is sliding into recession. Meanwhile, the European Central Bank is renewing its quantitative easing program in another attempt to jump start growth.
And there’s that $14 trillion of global debt with negative yield.
Fear rates going in the other direction
Interest rates will fluctuate at some point, but investors searching for a reason to be concerned should be on the lookout for rates to continue their slide, not suddenly skyrocket.
Investors paralyzed by interest-rate risk probably remember years when rates were much higher. But long memories cut both ways. Rates were indeed higher, but a simple chart tells an even bigger story: Long-term rates have been heading down for almost 40 years.
As longtime clients and friends know, we don’t believe investors have to fervently follow the twists and turns of economic news to succeed in the municipal bond market.
They simply need to focus on the most important aspect of muni investing. The real risk is trying to outguess the market and missing out on a steady stream of tax-free income.
