Skip to main content
logo
Financial Professional Login
Welcome
Log in for exclusive access and a personalized experience
Log in Sign up
Benefits of creating a free account
  • Customize our Guide to the Markets and unlock bonus slides
  • Utilize our award-winning Portfolio Construction and Retirement Planning Tools
  • Access expert commentary from Dr. David Kelly and more...
Hello
  • My Collections
    View saved content and presentation slides
  • My Subscriptions
    Manage my subscription preferences
  • Products

    Products

    • Mutual Funds
    • ETFs
    • SmartRetirement Funds
    • 529 Portfolios
    • Alternatives
    • Separately Managed Accounts
    • Money Market Funds
    • Commingled Funds
    • Featured Funds

    Asset Class Capabilities

    • Fixed Income
    • Equity
    • Multi-Asset Solutions
    • Alternatives
    • Global Liquidity
  • Investment Strategies

    Investment Approach

    • ETF Investing
    • Model Portfolios
    • Separately Managed Accounts
    • Sustainable Investing
    • Commingled Pension Trust Funds

    Education Savings

    • 529 Plan Solutions
    • College Planning Essentials

    Defined Contribution

    • Target Date Strategies
    • Startup and Micro 401(k) Plan Solutions
    • Small to Mid-market 401(k) Plan Solutions
  • Insights

    Market Insights

    • Market Insights Overview
    • Guide to the Markets
    • Quarterly Economic & Market Update
    • Guide to Alternatives
    • Market Updates
    • On the Minds of Investors
    • Principles for Successful Long-Term Investing
    • Weekly Market Recap

    Portfolio Insights

    • Portfolio Insights Overview
    • Asset Class Views
    • Equity
    • Fixed Income
    • Alternatives
    • Long-Term Capital Market Assumptions
    • Multi-Asset Solutions Strategy Report
    • Strategic Investment Advisory Group

    Retirement Insights

    • Retirement Insights Overview
    • Guide to Retirement
    • Principles for a Successful Retirement
    • Defined Contribution Insights
  • Tools

    Portfolio Construction

    • Portfolio Construction Tools Overview
    • Portfolio Analysis
    • Model Portfolios
    • Investment Comparison
    • Bond Ladder Illustrator

    Defined Contribution

    • Retirement Plan Tools & Resources Overview
    • Target Date Compass®
    • Core Menu Evaluator℠
    • Price Smart℠
  • Resources
    • Account Service Forms
    • Tax Planning
    • News & Fund Announcements
    • Insights App
    • Events
    • Library
    • Market Response Center
  • About Us
    • Diversity, Equity, & Inclusion
    • Media Resources
  • Contact Us
  • Role
  • Country
  • Shareholder Login
    Hello
    • My Collections
      View saved content and presentation slides
    • My Subscriptions
      Manage my subscription preferences
    • Log out
    Financial Professional Login
    Welcome
    Log in for exclusive access and a personalized experience
    Log in Sign up
    Benefits of creating a free account
    • Customize our Guide to the Markets and unlock bonus slides
    • Utilize our award-winning Portfolio Construction and Retirement Planning Tools
    • Access expert commentary from Dr. David Kelly and more...
    Log out
    Search
    Search
    Menu
    You are about to leave the site Close
    J.P. Morgan Asset Management’s website and/or mobile terms, privacy and security policies don't apply to the site or app you're about to visit. Please review its terms, privacy and security policies to see how they apply to you. J.P. Morgan Asset Management isn’t responsible for (and doesn't provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the J.P. Morgan Asset Management name.
    CONTINUE Go Back
    1. PM Corner: In conversation with the Tax Aware Strategies Team

    • LinkedIn Twitter Facebook

    PM Corner: In conversation with the Tax Aware Strategies Team

    Portfolio managers Rick Taormina, Curtis White and Josh Brunner discuss the state of the municipal market and opportunities in a short end that has significantly repriced to higher yields this year.

    10/20/2022

    Rick Taormina

    Curtis White

    Josh Brunner

    What is the advantage of an ultra-short municipal bond fund in a rising interest rate environment?

    Ultra-short strategies maintain a duration of less than one year across market cycles. The flexible duration provides a pickup in incremental yield as we step out beyond cash. When the Federal Reserve (Fed) is raising rates, that pickup can be meaningful. In the Treasury market, for example, four-week bills yield 3.32% while two-year notes yield substantially more at 4.45%. The municipal market has a similar slope given that municipals typically trade as a percentage of Treasuries. In addition, municipal investors can allocate to variable rate demand notes (VRDNs), which are reset daily or weekly and have a put at par; this can help reduce volatility by providing principal preservation and liquidity.

    Can I use an ultra-short bond fund as a cash alternative?

    In this environment especially, clients may want to examine the cash bucket and define an acceptable level of volatility from this portion of the portfolio. It may make sense to segment the cash allocation, first making sure there are enough funds in bank deposits or money market funds to cover any immediate expenses or commitments over the next nine months. Most true ultra-short funds may be appropriate for investors with an expected investment horizon of nine months or more; an allocation to a higher-yielding ultra-short strategy can help add incremental yield to a cash allocation.

    As we move into year-end, what do the technicals and fundamentals look like in the municipal market?

    Municipal fundamentals are in solid shape. Although there are some headwinds from higher inflation and moderating economic growth, credit fundamentals should remain stable well into 2023 given the strength of municipal balance sheets. As the Fed tries to engineer a slowdown, we expect states to continue the same fiscal discipline and conservative budgeting they demonstrated during the COVID-19 pandemic and, if necessary, draw on the record rainy day funds they’ve accumulated. We are being more careful in some sectors – health care, education and continuing care – that face longer-term issues.
    The technicals are a little more challenging. We’ve already seen record and persistent outflows this year from mutual funds. On the other hand, with state and local government entities flush with cash, and upcoming election uncertainty, supply has been lighter than expected. The spike in Treasury rates and higher market volatility have produced interesting opportunities in a market that finally offers some attractive yields.

    How much further do you expect the federal funds rate to rise, and how will that affect the strategy’s yield through the end of the year and into 2023?

    In our view, although the Fed is still likely to raise interest rates further, we are closer to the end of the rate hiking cycle than the beginning. The Fed raised rates 75bps on September 22, 2022 and made it very clear that strong economic data and persistently high inflation may require it to continue aggressively raising rates and tightening financial conditions. The Fed projected a 4.40% fed funds rate at the end of 2022 and a terminal rate of 4.60% in 2023. That translates to approximately another 75bps hike in November and 50bps in December. The very short end of the curve will adjust accordingly: Our Global Fixed Income, Currency and Commodities (GFICC) team’s year-end estimate for two-year Treasury bonds is 4.50% to 4.88% from the current yield of 4.45%.

    The strategy’s significant short-term exposure – almost 45% in cash, VRDNs and bonds that mature by year-end – will drive yields higher as the Fed moves up rates. Given our current rate forecast, we estimate that the Securities Industry and Financial Markets Association (SIFMA) yield will reset to about 3% by year-end, up from the current yield of 2.37%. This should translate to an attractive increase in overall portfolio yields.

    How are you positioned today, and what areas of the municipal market do you think are the most attractive in the short end?

    We have been cautious over the course of this year, keeping our duration in a range of 0.5-0.7 years, well inside the one-year maximum duration, and keeping an allocation of 20%-40% in readily available liquidity, including VRDNs. The allocation to VRDNs allows us to increase yield in the portfolio as the Fed raises rates without any principal at risk. The allocation also serves as a shock absorber, contributing to a much smoother ride for investors in times of volatility. We also look to add value by being a liquidity provider in volatile markets, stepping in to set levels that we think will sustain their value. We continually look for high-quality rated notes, as well as non-rated notes from investment-grade issuers with acceptable internal ratings, that are priced with a significant yield concession. We are also opportunistic: We aggressively bid odd lots when the spread is 20-30bps over round lots and look for cheaper new issues.

    We have stayed short but will likely extend duration once we think the Fed is coming to the end of its hiking cycle and rates have peaked. As a guidepost, we want to see inflation below the fed funds rate on an annualized basis. Historically, the Fed stops hiking when the policy rate is above inflation. At that point we would expect a slower economy to result in a stabilization in short rates, which is when we want to add duration. As always, the state of Fed policy and market conditions will impact our duration, credit and allocation to VRDNs.

    We continue to comb the market for credit opportunities but acknowledge the Fed’s intention is to slow the economy. That’s a fundamental change. As a result, we are scrubbing existing holdings to make sure we want to continue owning them as the cycle evolves. As we look across the market, we finally see some very interesting opportunities, including a yield cushion to offset any incremental increase in rates.

    EXPLORE MORE

    Ultra-Short Income ETF (JPST)

    Current income with a focus on risk management. Leveraging the conservative philosophy of J.P. Morgan Global Liquidity, the Fund aims to deliver current income while managing risk.

    More about this fund

    Ultra-Short Municipal Income ETF (JMST)

    Tax-exempt current income with a focus on risk management. The Fund aims to deliver current income exempt from federal income taxes while managing risk. More about this fund

    More about this fund

    Risk Summary

    Investments in asset-backed, mortgage-related and mortgage-backed securities are subject to certain risks including prepayment and call risks, resulting in an unexpected capital loss and/or a decrease in the amount of dividends and yield. During periods of difficult credit markets, significant changes in interest rates or deteriorating economic conditions, such securities may decline in value, face valuation difficulties, become more volatile and/or become illiquid.

    The risk of a municipal obligation generally depends on the financial and credit status of the issuer. Changes in a municipality's financial health may make it difficult for the municipality to make interest and principal payments when due. Under some circumstances, municipal obligations might not pay interest unless the state legislature or municipality authorizes money for that purpose. Municipal obligations may be more susceptible to downgrades or defaults during recessions or similar periods of economic stress.

    J.P. Morgan Asset Management

    • Capital Gains Distributions
    • eDelivery
    • Fund Documents
    • Glossary
    • Help
    • How to invest
    • Important Links
    • Mutual Fund Fee Calculator
    • Accessibility
    • Form CRS and Form ADV Brochures
    • Investment stewardship
    • Privacy
    • Proxy Information
    • Senior Officer Fee Summary
    • SIMPLE IRAs
    • Site disclaimer
    • Terms of use
    J.P. Morgan

    • J.P. Morgan
    • JPMorgan Chase
    • Chase
    Opens LinkedIn site in new window Opens Youtube site in new window Opens Twitter site in new window

    This website is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of J.P. Morgan Asset Management, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax and other professionals that take into account all of the particular facts and circumstances of an investor's own situation.

     

    Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

     

    INFORMATION REGARDING MUTUAL FUNDS/ETF: Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund or ETF before investing. The summary and full prospectuses contain this and other information about the mutual fund or ETF and should be read carefully before investing. To obtain a prospectus for Mutual Funds: Contact JPMorgan Distribution Services, Inc. at 1-800-480-4111 or download it from this site. Exchange Traded Funds: Call 1-844-4JPM-ETF or download it from this site.

     

    J.P. Morgan Funds and J.P. Morgan ETFs are distributed by JPMorgan Distribution Services, Inc. JPMorgan Private Markets Fund is distributed by J.P. Morgan Institutional Investments Inc. Both are affiliates of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. JPMorgan Distribution Services, Inc. is a member of FINRA  FINRA's BrokerCheck

     

    INFORMATION REGARDING COMMINGLED FUNDS: For additional information regarding the Commingled Pension Trust Funds of JPMorgan Chase Bank, N.A., please contact your J.P. Morgan Asset Management representative.

     

    The Commingled Pension Trust Funds of JPMorgan Chase Bank N.A. are collective trust funds established and maintained by JPMorgan Chase Bank, N.A. under a declaration of trust. The funds are not required to file a prospectus or registration statement with the SEC, and accordingly, neither is available. The funds are available only to certain qualified retirement plans and governmental plans and is not offered to the general public. Units of the funds are not bank deposits and are not insured or guaranteed by any bank, government entity, the FDIC or any other type of deposit insurance. You should carefully consider the investment objectives, risk, charges, and expenses of the fund before investing.

     

    INFORMATION FOR ALL SITE USERS: J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.

     

    NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

     

    Telephone calls and electronic communications may be monitored and/or recorded.
    Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://www.jpmorgan.com/privacy.

     

    If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance. 

     

    Copyright © 2023 JPMorgan Chase & Co., All rights reserved