Municipal bond investments and rising interest rates

Owning individual municipal bonds may be beneficial, even in a rising interest rate environment.

The municipal bond market is large, complex, and can be difficult to navigate. Interest rates have been gradually rising since June 2016 and, given this environment, you may have concerns about owning bonds in your portfolio. However, as a separately managed account (SMA) client, your bond portfolio is professionally managed. Your investment team—which includes portfolio management, research, and trading resources—has experience investing through both rising and falling interest rate environments. They put these capabilities to work for you to help you reach your financial goals.

3 key reasons to consider owning investment-grade municipal bonds in today's markets

1. When interest rates rise, bond prices typically fall, but the principal value should still be repaid

While the market value of a bond will move up and down, the face (or par) value remains fixed and should be repaid in full at maturity, assuming the issuer has not defaulted on the bond. This may help provide reassurance to those who worry about price movements, because the face value is set at the time of purchase.

Your investment team evaluates your account on an ongoing basis in an effort to ensure you have the appropriate mix of bonds to help meet your financial goals. They may seek to enhance the value of your portfolio by selling a bond prior to maturity, depending on market conditions.

Interest rates may change, but a bond's principal value should be repaid


View larger image

This chart is for illustrative purposes only and does not represent actual or future performance of any investment option or strategy. The chart assumes that the issuer has not defaulted on the bond, and represents a hypothetical premium bond.

2. Rising interest rates may provide an opportunity to earn more income

Your investment team uses its experience to find new investment opportunities for your account. When a bond matures in your account, they seek to take advantage of rising rates by using the proceeds to invest in a new bond—potentially at higher interest rates. This can be an impactful way to take advantage of rising rates and earn higher income payments while still maintaining a diversified portfolio of bonds in your account.

Your investment team monitors all bonds in your account for credit quality and may also sell a bond if the quality declines.

Potential benefits of reinvestment in a rising-rate environment
Bond matures, providing the opportunity to use proceeds to buy a bond with a higher interest rate
(Hypothetical example)


View larger image

This chart is for illustrative purposes only and does not represent actual or future performance of any investment option or strategy. Coupon rate is the annual interest rate paid on a bond.

3. Bonds may provide stability regardless of the direction of interest rates

Investment-grade bond prices, including investment-grade municipal bonds, tend to be less volatile than stocks. History suggests that stock and bond prices often move in opposite directions. During periods of stock market volatility, bonds may provide stability. This has often been the case regardless of the direction of interest rates, including the long-term rising rate period from the early 1950s to the early 1980s.

We believe a well-diversified portfolio with municipal bonds can help balance risk and provide an overall smoother investment experience, compared to a portfolio that invests in the stock market only.

Staying invested can be challenging, but experience shows that sticking to your long-term plan may be beneficial. Rising interest rates typically impact the price of bonds, but we believe bonds, including investment-grade municipal bonds, play an important role in your portfolio in any interest rate environment.

Stocks vs. investment-grade municipal bonds over 20 years, 1998–2018


View larger image

This chart is for illustrative purposes only. Past performance is no guarantee of future results. The chart shows the growth of a hypothetical $100,000 investment between June 1, 1998 and June 30, 2018, based on cumulative total returns for the indexes shown. Bond returns are represented by the performance of the Bloomberg Barclays Municipal Bond Index. Stock returns are represented by the performance of the S&P 500 Index. Source: Fidelity Investments as of 6/30/18. All indexes are unmanaged, and performance of the indexes includes reinvestment of dividends and interest income, unless otherwise noted. Indexes are not illustrative of any particular investment and it is not possible to invest directly in an index. Securities indexes are not subject to fees and expenses typically associated with managed accounts or investment funds.


Talk to an investment professional

Call 800-544-3455