07/15/2015

A New Approach to Bonds

by

The July 11, 2015 issue of Barron’s features a cover story on investing in bonds which includes a favorable perspective on municipal bonds, amid general concerns regarding rising rates.  While the timing and magnitude of a future Fed Funds rate increase is still uncertain, expectations cluster around a 0.25% increase in September, 2015.  If we do see a rate increase in September, it won’t be the first time that rates have gone up.  Over the past 30 years, interest rates have been declining, but that general trend is marked by periods in which the Fed Funds rate rose by as much as 4%.

The head of a fixed-income asset management company is quoted in the Barron’s article, saying “the rich are getting richer, and they’re getting older”.  The point relates to demand for municipal bonds in that there is a growing population of aging investors attracted to the tax-exempt income offered by municipal bonds.  Recently, the supply of municipal bonds has declined as municipal issuers have worked to manage their budgets.  Supply is likely to decline further in an environment of higher rates which increase the cost of borrowing for these issuers.  Limited supply and heightened demand can provide support for prices.

The Barron’s article also points out that rising rates typically have less impact on municipal bonds than on taxable bonds.  There have been several recent periods in which municipal bonds have traded at yields comparable to or higher than taxable bonds.  When that has occurred, we’ve seen so-called crossover buyers (institutions that would not typically hold muni bonds) purchase muni bonds for the yield advantage, providing some support for prices.

Two key aspects of the Aquila municipal bond fund investment strategy are also mentioned within the general context of the Barron’s article.  One is the importance of being selective when it comes to credit quality.  Each of the Aquila municipal bond funds buys investment grade bonds – those in the 4 highest credit rating categories.  Also mentioned is the strategy of laddering bond maturities.  Portfolio managers of the Aquila municipal bond funds construct a blend of bond maturities within each fund portfolio to establish an intermediate average maturity.  During periods of rising rates, bonds maturing in the near-term provide available cash to invest in higher yielding bonds as those become available, with the opportunity to incrementally increase the income available to fund shareholders.

Even though a 0.25% increase in the Fed Funds rate has been anticipated for some time now, and appears to be priced into the bond market, we anticipate some volatility when the Fed eventually announces a rate increase.  Varying degrees of volatility are inherent in securities markets.  In order to achieve financial goals, it is important for investors to develop a long-term plan and select asset allocations that are appropriate to achieving their objectives and aligned with their tolerance for risk.  A well-developed investment plan can help investors cope with the emotional aspects of market volatility.

You will find complete information on the municipal bond funds offered by Aquila Group of Funds on this site, including the prospectus, the most recent quarter-end portfolio holdings, and illustrations of fund performance during past periods of rising rates.

Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available from your financial professional, and when you call 800-437-1020 or visit www.aquilafunds.com.