Many investors seem content to sit in cash. But with the market pricing in rate cuts by July, we think it’s time for muni investors to jump back in now. Here’s why.
Historically, putting cash to work in munis before easing began resulted in significantly higher returns than waiting until after cuts started (Display above). In fact, investors who entered the market two to three months before the first Fed rate cut saw more than double the 12-month return of those who waited until just one month after. Those who delayed until two or three months after the first cut left more than 400 basis points on the table. That’s because bond yields tend to fall—and bond prices rise—in anticipation of Fed action.
Meanwhile, investors who remain parked in cash equivalents will likely fail to keep up with the muni market, especially on an after-tax basis. Treasury bills and other cash equivalents lack duration—or sensitivity to changes in interest rates—so their prices don’t rise when yields fall. Further, investors can expect cash returns to decline as the Fed eases. That erosion can happen quickly, as the Fed tends to cut rates much faster than it hikes. That’s why, with the Fed likely to start easing soon, we think today is the ideal time to return to munis.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.
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