Battered Bonds

For the first four months of the year, the performance of municipal bond funds, and similar Build America Bond funds, can best be described as a “failure to launch.”

You’ll see in the percentage-change chart below, these funds simply went nowhere as investors preferred the early gains provided by stocks, which were up more than 10% by the beginning of May.

That’s when, as I highlighted yesterday, we started to see a near-term rise in interest rates. And this, of course, sent bond funds spiraling lower.

See larger image

Year-to-date, municipal bonds (MUB) are down nearly 5%. Build American bonds (BAB) are down 6.3% so far.

Of course, municipals weren’t the only bonds hit by the sharp rise in rates. Treasury bonds are down… so are corporate bonds… and junk bonds, as well.

While rising interest rates put negative pressure on all bond prices, the effect is not the same across the board. Riskier bonds will get hit the worst, while municipal bonds will likely hold up better, as investors typically perceive these as being less risky.

We’re actually working now to cover this topic in much greater detail in the near future. The spread between high-risk and low-risk bonds provides astute investors an opportunity to profit, even as near-term interest rates rise. More on this soon… stay tuned.

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.