Muni-Market Mainstay Seen as Cushion When Fed Does Raise Rates
- Premium callable bonds provide high interest payments
- Investors receive extra yield for risk of debt being called
This article is for subscribers only.
When the Federal Reserve gets around to raising interest rates, bond buyers may find some shelter in a mainstay of the municipal market.
Investors should consider purchasing high-coupon state and local debt that governments have the right to buy back at face value in the future, Alan Schankel, a managing director at Philadelphia brokerage Janney Montgomery Scott, wrote in a report released Monday. While the securities are trading well above par -- exposing holders to losses if they’re forced to sell them back for 100 cents on the dollar -- the higher interest payments mean the bonds won’t fall as much as others when the central bank moves.