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Municipal Bonds

Taxable municipal bonds: bouncing back

Daniel J. Close
Head of Municipals
Kristen M. DeJong
Portfolio Manager
Philip C. Traven
Portfolio Manager
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The U.S. Treasury yield curve flattened during the fourth quarter with yields increasing across the curve, reflecting continued stubborn inflation and shifting U.S. Federal Reserve (Fed) policy expectations. Taxable municipal bonds underperformed corporate bonds and Treasury bonds due to their long duration stance in a rising rate environment. With favorable near-term valuations, taxable municipal bonds should see improved performance through a more range bound Treasury market environment. This environment makes current valuations an attractive entry point for long-term investors.

Key takeaways

Outlook

Seasonal strength should support municipals

The taxable municipal bond market is well positioned to begin the first quarter.

Supply remains suppressed amid persistently high interest rates, with advanced refunding volume remaining muted compared to 2020 and 2021 levels. While supply remains benign, the elevated pace of maturities, calls and coupons in January may provide additional technical support. Throughout 2025, we expect a net negative supply environment for taxable municipal bonds.

Credit spreads remain relatively attractive, with A rated municipal bonds at 77 basis points (bps) option adjusted spread. While credit markets have broadly tightened in response to a robust economy and strong appetite for yield, the taxable municipal market continues to offer greater spread relative to corporate bonds for equally-rated bonds.

The credit spread curve continues favoring investors through absolute yield and relative value. Despite interest rate policy expectations meaningful shift in the final quarter of 2024, the taxable municipal spread curve continues to provide value for investors looking to increase duration and yield. The steepness of the taxable municipal spread curve out to 12-year duration rewards investors with higher income than typically associated with longer-dated bonds, and potential to earn additional total return through a combination of stable or declining rates and credit spread narrowing through the holding period. However, active yield curve management is important, as duration longer than 12 years sees diminished benefits and requires careful selection.

2025 Themes

Economic environment
Municipal market environment

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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

Investing involves risk; principal loss is possible. 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. 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.

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