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Investing in America
It’s not what you earn, it’s what you keep.®
Municipal bonds can help build communities and investment portfolios
Municipal bonds help build bridges, schools, hospitals, roads and other structures that improve our communities. In addition to enhancing our quality of life, many investors find municipal bond investments to be a valuable addition to their portfolios.
Municipal bonds are debt instruments issued by states, cities, counties, special purpose districts and nonprofit organizations, typically to finance capital improvements, meet cash needs or refinance existing debt. Through municipal bonds, investors lend money to these entities to fund infrastructure projects and support essential services. Owning a municipal bond is similar to owning an IOU. The investor is owed the principal amount of the loan, plus interest, over a given time period. It is important to remember that there are no guarantees of payment.
The municipal bond market has changed
Investing in municipal bonds has become more complicated in recent years. Understanding the market dynamics may help investors evaluate the need for actively managed municipal bond solutions.
Municipal market changes underscore the need for research
Economic uncertainty and changes in credit fundamentals can cause movements in credit spreads, which are the difference between yields of lower- and higher-quality bonds. When spreads shift, opportunities may arise to capture additional yield. Investment managers conduct independent credit research to manage credit risk.
Municipal supply remains stable, but net tax-exempt supply is decreasing
The Tax Cuts and Jobs Act of 2017 eliminated advance refunding of municipal bonds by issuing tax-exempt bonds. As a result, taxable municipal bonds are being used to advance refund existing bonds and are becoming a larger part of overall issuance. The tax-exempt supply has been outpaced by bond maturities and calls.
Bonds are not created equal, even when their ratings are the same
Because the rating scales have changed, bonds with the same credit rating may show a wide yield range, making it difficult to assess each bond. Investment managers do extensive research to determine if a higher-yielding bond is compensating an investor adequately for the risk.
Individual investors are at a pricing disadvantage
There is no central location like an exchange to trade municipal bonds, which can make it challenging for retail investors to obtain the best prices. Buying and selling bonds is generally more expensive for individual investors who trade in smaller blocks of bonds than for institutional investors that buy and sell in bulk.
Capture the tax-exempt advantage with municipal bonds
If you are seeking tax relief, the interest earned on municipal bonds is exempt from regular federal taxation. Additionally, bonds issued from entities within a certain state are often exempt from taxation in that state. Occasionally, bonds issued within a certain municipality or region are exempt from taxes in that municipality, possibly providing triple tax exemption — federal, state and local.
The tax-exempt advantage
Municipal bonds can be advantageous, particularly if you are in a higher tax bracket. To make a fair comparison between a tax-exempt investment like a municipal bond and a taxable investment, you need to adjust the tax-exempt investment’s yield to account for money you save in regular federal, and sometimes state income taxes.
Diversify with municipal bonds to help reduce risk in a portfolio
Two is greater than one
Since different asset classes involve different types of risk, diversifying your portfolio may help reduce overall portfolio volatility.1 A balance of equities and municipal bonds has historically lowered the overall investment risk (measured by standard deviation) and provided attractive after-tax returns compared with an all-equity portfolio.
Over the 20-year period from 2001 – 2020, a portfolio of municipal bonds and equities provided comparable after-tax returns with similar or less risk than equivalent Treasury or corporate blends.
Adding municipal bonds to a portfolio can help reduce risk and improve returns
40% municipal / 60% equity mix assumed less risk and added more after-tax return than an all-equity portfolio over 20 years.
Dampen volatility by enhancing portfolio diversification
Municipal bonds can act as a diversifier
Municipal bond returns over the last 20 years have shown relatively low correlations with returns of select fixed income and equities. With this in mind, adding municipal bonds to an overall portfolio may help diversify and reduce the return volatility of the portfolio. It is important to remember that correlation patterns can change during periods of market corrections.
Selecting investments that are not highly correlated may help smooth out portfolio volatility
Correlation shows how closely investments move in relation to each other. Allocating to municipal bonds in a portfolio that includes traditional income and equities can diversify the portfolio to reduce risk and act as a hedge against return volatility.
How do different investment solutions compare?
Municipal bond funds may allow investors to:
- Earn tax-exempt income
- Realize attractive after-tax returns
- Diversify an overall investment portfolio
- Reduce overall portfolio volatility
Active management can add value
Nuveen believes five key differentiators are important to creating portfolio growth.
- Credit research: The experienced research team evaluates municipal bonds and sectors, seeking to find value in bonds that the general public may have overlooked.
- Institutional access: Nuveen navigates the inefficient municipal bond market through established relationships with more than 100 national and regional dealers.
- Institutional trade execution: A large presence in the market provides greater access to inventory to find bonds in appropriate sizes and at institutional prices.
- Tax-aware investing: The ability to trade at institutional prices allows the team to efficiently capture tax losses and use them to offset gains.
- Active portfolio oversight: By actively trading bonds, the team seeks to sell appreciated bonds, capture gains and purchase bonds that have the potential to enhance overall portfolio returns.
What are the ways to invest in municipal bonds?
Nuveen offers national and state municipal bond portfolios for investors seeking tax-exempt income.
- High Yield
- Intermediate Duration
- Limited Term
- Short Duration High Yield
- Short Term
- Strategic Municipal Opportunities
Separately managed accounts
A word on risk
Investing involves risk; principal loss is possible. 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. Credit risk refers to an issuers ability to make interest and principal payments when due. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. The funds’ use of inverse floaters creates effective leverage. Leverage involves the risk that the funds could lose more than its original investment and also increases the funds’ exposure to volatility, interest rate risk, and credit risk. Closed-end fund shares are subject to investment risk, including the possible loss of the entire principal amount that you invest. Common shares frequently trade at a discount to their NAV. At any point in time, your common shares may be worth less than you paid, even after considering the reinvestment of fund distributions.
Important information about the study, Two Is Greater than One
You may request a free copy of the “Two is Greater than One” research study to learn more about the potential benefits of a diversified portfolio that includes municipal bonds.
All investment income generated by the portfolio was considered to be reinvested annually, along with the after-tax proceeds of an arbitrarily assumed 20% annualized turnover rate. The allocation between the two assets was allowed to roam within a 1% band around its target before rebalancing. No provision was made for investment fees or commissions. Investment income was taxed at the historically appropriate rate for an individual with $100,000 in taxable income in year 2020 dollars; net capital gains taxes, if any, were deducted at the rate appropriate for the period. At the end of 2020, the portfolios were fully liquidated to recognize the existing tax liability. Different economic periods and different assumptions, such as tax rate, will have different results.
This study was based on historical data gathered from sources we consider to be reliable and consistent. The methodology applied and results produced by this study indicate past investment performance of market indices over the 01 Jan 2001 – 31 Dec 2020 time period exclusively and in no way should be considered representative of the past performance of any investment product or predictive of future investment expectations and performance for the municipal market or investment products. Investors should consult with their financial professionals before making any tax or investment decisions.
The various types of investments presented involve different types of risk. Equities can provide higher returns but also have greater volatility than municipal bonds. Municipal and corporate bonds include the individual credit risk of the municipal or corporate borrower and the general interest rate risk of lower bond prices due to rising interest rates. While Treasuries are backed by the full faith and credit of the U.S. Government as to the timely payment of principal and interest, these securities are also subject to interest rate risk.
Asset class related risks
Different types of asset investments have different types of risks, which may provide higher returns but also greater volatility. In general, equity securities tend to be more volatile than fixed income or hybrid securities. Foreign investments may involve exposure to additional risks such as currency fluctuation and political and economic instability. The value of, and income generated by, debt securities will decrease or increase based on changes in market interest rates. High yield corporate bonds are subject to liquidity risk and heightened credit risk. Government bonds are guaranteed as to the timely payment of principal and interest.
Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation co-efficient of -1) means that securities will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; their movements in relation to one another are completely random.
Taxable-equivalent yield is the yield an investor would have to realize on a fully taxable investment to equal the stated yield on a tax-exempt investment, at a specified assumed tax rate. It is calculated by dividing the tax-exempt yield by 1 minus the tax rate.
The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
The Bloomberg Emerging Markets USD Aggregate Index is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate U.S. dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.
The Bloomberg Municipal Long Bond Index is a subset of the Bloomberg Capital Municipal Bond Index including maturities of 22 or more years.
The Bloomberg U.S. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by U.S. and non-U.S. industrial, utility and financial issuers.
The Bloomberg U.S. Long Credit Index is a subset of the Bloomberg U.S. Credit Index which measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets.
The Bloomberg U.S. Municipal Bond Index covers the USD-denominated long-term tax-exempt bond market.
The Bloomberg U.S. Treasury Long Index includes securities in the long maturity range of the U.S. Treasury Index. Securities must have a maturity of 10 years or more.
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada.
The S&P 500® Index is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
If evaluating investment companies, please carefully consider the investment objectives, risks, charges and expenses before investing. For this and other information that should be read carefully, please request a prospectus or summary prospectus from your financial professional or Nuveen at 800.257.8787.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen, LLC.
Nuveen Securities, LLC, member FINRA and SIPC.