A Rising Rates Playbook

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M

Idea

September 15, 2026 08:11 PM GMT

Morgan Stanley & Co. LLC

Municipal Strategy | North America

Mark T Schmidt, CFA

Strategist

A Rising Rates Playbook

Morgan Stanley India Company Private Limited+

Gowtami P Pyla

As yields move higher, we stress the muni market across a range

of curve shocks. Intermediate maturities usually perform best. In

a bear flattener, barbells usually do better than ladders. As for

barbell weights, keep it on the lighter side: 17-22Y maturities can

work just as well as 22Y+.

Strategist

Key Takeaways

We apply a variety of interest rate scenarios to the muni market, calculating

performance for >200k CUSIPs.

In general, munis can withstand another 25bp of rate increases well – after that,

convexity starts to bite.

We estimate more than 30% of CUSIPs could be subject to de minimis taxation if

yields rise 50bp.

Long gas prepay (10Y put) would be negatively exposed to a bear flattener, but

overall risk-reward still looks balanced given many deals are shorter (3-5Y put).

4% coupons on the cusp of de minimis may be less attractive than pairing deepdiscount 3s with 5s near par.

Our economists now think the Fed will hike. One or two rate hikes is not the same

thing as a sustained march towards higher rates across the curve. Fed futures &

swaption markets tell a similar story – rising long-end rates are possible, but far

from a done deal. But what if rates move higher across the curve? To stress test

our thinking, we calculated interest rate shock scenarios for the entire muni market

on a bond-by-bond basis. Our calculations encompassed flatteners and steepeners,

both bull and bear, as well as a variety of parallel shifts.

Exhibit 1:

The next 25bp is fine – if yields across the curve rise more than that,

then things get tricky

Market Duration To Worst - Parallel Curve Shifts

8.5

8

Duration (yrs.)

7.5

7

6.5

6

5.5

5

4.5

-100

-75

-50

Source: MSRB, Morgan Stanley Research

-25

-10

0

10

Parallel Shift in MMD AAA Curve (bp)

25

50

75

100

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