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Munis can help hedge against equity sell-offs

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The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Michael J. Sullivan, CFAInstitutional Portfolio Manager, Eaton Vance

      Boston - For investors worried about stock drop-offs, municipal bonds — which correlate negatively with equities — can help to diversify portfolios, protect against volatility, and weather stock sell-offs.

      The chart below shows the five largest equity drops since January 2009 compared with muni bond gains during the same periods.

      Top 5 Sell Offs

      In these five drawdowns, as the stock index plummeted an average of 19.39%, the Bloomberg Barclays index returned 3.47% on average.

      Munis also offer particular advantages for high-tax-bracket investors because they are exempt from federal — and sometimes state and local — taxes.

      Bottom line: Investors seeking tax-advantaged instruments to diversify equity-heavy portfolios should give muni bonds a close look.

      Income may be subject to state and local taxes and potentially the AMT.

      Investing involves risks including the risk of loss. An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. In general, the bond market is volatile. As interest rates rise, the value of certain income investments is likely to decline.

      The Bloomberg Barclays Municipal Bond Index is an unmanaged index of taxable municipal bonds traded in the U.S.