The Wall Street Journal recently published an article regarding “Highly Leveraged Closed-End Municipal Bond Funds.” While this phrase may be vaguely familiar to financial advisors who have spent significant time learning about various financial instruments, for most people, this batch of high context terms provides little to no clarity. The article goes on to say that, during the past decade, while interest rates were historically low, these funds took out cheap loans to supercharge their yields. However, with rising interest rates over the past two years, that strategy has proven to be less effective, to put it lightly.
This Wall Street Journal article is one of many already written and many more to come, which will describe the pain points of returning interest rates back to a normalized level, or to equilibrium. A particular area you are likely to see the squeeze is in complex or creative financial strategies that relied on low interest rates, or cheap money for their benefit. Meme stocks, speculative bets, and typically boring investments that are leveraged with cheap loans are all elevated in a low interest-rate environment. You probably recall your friends or neighbors describing some new investment strategy they were using to “get rich.” Those conversations have probably been somewhat muted recently.
Normalized interest rates drive investors back to long-term focused strategies like knowing the fundamentals of the companies you own, diversifying your portfolio, mitigation of risk, and reasonable expectations. My guess is that these terms are far more familiar to you than the one which began this article. These terms are ultimately, the ones that truly matter over time.
Eric Puckett
1. Wall Street Journal, Heather Gillers, Oct 12, 2023 “Highly Leveraged Closed-End Muni Funds Take Big Hit”