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The Federal Reserve's pledge to curb inflation appears to have resonated with the market. If the central bank raises rates as much as recent projections indicate, the risk of recession rises. Consequently, bond yields have been pulling back from recent highs and the yield curve has flattened.
Inventory gluts have been bad news for the stocks of companies experiencing them, but could also be indicating an inflation peak, which tends to be an ingredient for market bottoms.
We suggest that muni investors consider taking advantage of the recent selloff by moving up in both credit quality and coupon structure, and moderately extending duration.
After the steep drop in prices during the first half of this year, yields on many corporate bond investments are at or near 12-year highs. While that is attractive from an income perspective, we still suggest a maintaining a defensive approach, as risks are rising.
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