Municipal bonds, which have a yield advantage over U.S. Treasuries, are likely to be among fixed income segments that could outperform in 2014 as U.S. Treasury yields start to move higher, according to a new report from Standish Mellon Asset Management Co.
“Excess yield cushions the impact of gradually rising rates,” Christine Todd, president of Standish, BNY Mellon’s fixed income specialist, said in a statement.
Todd noted that municipal bonds have generally produced positive total returns, even during periods when the Federal Reserve is tightening monetary policy by raising short-term interest rates.
The report cautioned that municipal bond returns could be at risk in 2014 because of liquidity, which might be strained by actions of investors, issuers and regulators. It said negative returns precipitated mutual fund redemptions last year, which led to forced selling by fund managers.
As well, the lack of clarity over federal regulations limited many financial institutions’ willingness to allocate to municipal bonds, reducing the depth of the market’s support, Standish said.
Todd pointed out, however, that institutions and individuals continued to buy municipal bonds during 2013.