Title: How Muni Ladders May Reduce the Sting of Rising Rates

New York - It might feel like a different landscape for investors in municipal bonds after the big moves in yields and prices this past month. Thankfully, they are historically rare. But like the "taper tantrum" of 2013, they can be unnerving when they do happen.

Yields on the U.S. 10 year Treasury note were trading at 3.23% as of this writing, up almost 83 basis points in 2018 and well above their July 2016 low of 1.36%, according to Bloomberg data. Meanwhile, the yield on 10 year AAA munis has increased 68 basis points in 2018.

Not surprisingly, investors can get nervous when volatility ratchets up, and the Federal Reserve is raising rates. When asset prices are declining, a certain amount of investor anxiety is natural. The impulse to cut and run can be overwhelming.

However, we believe a professionally managed ladder strategy can help investors stomach volatility and focus on the long term. Our Laddered Investing Interest Rate Scenario Tool nicely illustrates how this can work for advisors and investors. The lowest yielding bond will roll out of the ladder and be replaced by the longest and highest yielding maturity in the portfolio. When rates rise, reinvestment occurs at those new higher rates/lower prices.

Blog Image Muni Ladder Roll Oct 9

Rapid rate increases such as we have seen recently can have very little impact on laddered strategies in the long run, because of the benefits of reinvesting at higher rates. For example, looking at the cumulative return today of an A-rated muni 5-15 year ladder over a 10-year time frame, the annualized total return is 3.50%. If you run a scenario where you raise rates 100 basis points over the next year, the annualized total return remains 3.51% (losses in year one are offset by higher yields going forward).