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.
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.