Tax Revenue Is Rising With Inflation. That’s Good for Muni Bonds

Inflation might not be all that bad for municipal bonds.

State and local debt has already posted a 0.9% loss since the start of the year amid speculation the Federal Reserve could raise interest rates as soon as March to combat inflation.

However, munis can offer a hedge against rising prices because their credit quality could actually improve as a result of it, according to MacKay Municipal Managers.

In a report released Thursday, MacKay Shields’ municipal-bond team noted that higher price pressures can mean municipalities are collecting more in taxes that support bond repayment. For example, toll road operators often ...