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Weekly CIO Commentary
Munis make their mark amid tariff uncertainty
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U.S. equities navigate a U-turn. Since bottoming on 08 April, the S&P 500 Index has returned almost 20% — aided by a 3.3% surge on 12 May alone and a 5.3% gain for last week as a whole — erasing its year-to-date losses. The most recent accelerant: a deal reached over the 10-11 May weekend in which the U.S. and China pledged to reduce tariffs and start a new round of trade talks.
Because U.S. tariffs are still at post-World War II highs, though, we expect them to create headwinds for the U.S. economy. Our models now show both hotter inflation and a slower rate of GDP expansion for 2025 compared to our pre-02 April forecast (Figure 1). The possibility of recession remains at 35%. -
Have tariffs made their mark on the U.S. economy? Maybe. On one hand, retail sales edged up only +0.1% in April after jumping +1.7% in March, when customers front-loaded their purchases in anticipation of the import levies. But on the other hand, inflation appears to be under control — for now anyway — suggesting tariffs have yet to filter into higher prices. The Consumer Price Index rose +2.3% on an annualized basis last month, the lowest reading since February 2021. Meanwhile, the Producer Price Index, which measures prices paid by manufacturers, wholesalers and retailers, fell from +3.4% year-over-year in March to +2.4% in April.
We doubt April’s inflation reports will alter the U.S. Federal Reserve’s expected timeline for rate cuts and continue to expect two rate reductions by year-end. However, our assessment could change based on how inflation and the labor market move. Against this mixed and uncertain backdrop, we continue to lean toward Against this backdrop, we continue to lean fixed income segments offering compelling yields, solid fundamentals and the potential for capital gains.
Against this backdrop, we continue to lean toward fixed income segments offering compelling yields.
Current yields are elevated for investment grade and high yield munis.
Portfolio considerations
Although tax season may officially be over, municipal bonds remain among our favored asset classes. Munis have struggled so far this year, as their yields have risen in tandem with other fixed income sectors following President Trump’s Liberation Day announcement. Notably, the upswing in yields has been unrelated to credit concerns — tax-free bonds remain on solid financial footing, with state and local governments recording “rainy day funds” at 15% of 2025 spending levels, a dramatic increase over the 8% registered in 2019.
Munis also face challenges on Capitol Hill, with lawmakers looking to extend the 2017 Tax Cuts and Jobs Act. The possibility of Congress eliminating munis’ tax-exempt status in a bid to raise revenue fueled a sharp increase in supply as municipalities raced to issue bonds in hopes of their being grandfathered under the old law. We believe munis will retain their favorable tax treatment given the essential nature of municipal projects.
Another revenue raiser contemplated by Congress is lifting the top federal marginal tax rate from 37% to 39.6%, which would boost the maximum tax-equivalent yield for investment grade (IG) munis from an already healthy 6.86% to 7.17%.
Current yields are elevated for IG and high yield munis, with income comfortably above, or in line with, long-term averages (Figure 2). Overall, yields are in the 97th percentile compared to payouts over the past ten years ended 28 April 2025. Since higher yields translate to lower prices, municipal bonds could be poised to deliver not only income, but the potential for capital gains as well.
Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
- insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
Related articles
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Access previous issues of Saira Malik’s weekly CIO commentary on strategy and portfolio construction.
Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. The value and income generated by bonds and other debt securities will fluctuate based on interest rates. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. No representation is made as to an insurer’s ability to meet their commitments. This information should not replace an investor’s consultation with a financial professional regarding their tax situation. Nuveen is not a tax advisor. Investors should contact a tax professional regarding the appropriateness of tax exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
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