Even though the price of money will increase sometime this year, municipal bonds should still have decent, if unspectacular, returns, investment managers said Tuesday.
“We feel that, despite rising interest rates, that we will still be able to have for municipal investors a low- to middle-single-digit return,” Greg Gizzi, senior portfolio manager for municipal fixed income at Delaware Investments said at a conference hosted by the firm in Manhattan.
Income, not appreciating price, is the key to obtaining good numbers in municipal bonds, he said.
The recent 10-year return on municipal bonds was 4.69 percent, according to the S&P Municipal Bond Index.
Gizzi’s prediction is based on his belief that income from the portfolio will offset any price drop due to the Federal Reserve increasing interest rates.
The modest interest rate increase will be accompanied by a flattening of the yield curve, he added.
The Fed, another Delaware manager said, now has the justification to increase rates.
“They have the cover to do so. The employment picture is clearly pretty strong,” said Brian McDonnell, senior portfolio manager, senior structured products analyst, Delaware Investments.
“If you look at a lot of the measures of inflation, while they don’t look like they are high enough or close enough to the Fed’s target to raise rates, one of the things they like to look at is inflation expectations,” he added.
McDonnell said that the expected inflation rate is 2.7 percent over the next year and about the same rate over five years.