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Municipal Bonds
The what, why and how of the global fixed income and municipal markets
The evolving fixed income market environment Key 2023 themes
Economic environment
- U.S. growth to weaken
- Global growth momentum softens
- End to central banks’ tightening nears
- Fiscal policy support diminishing
Portfolio positioning
- Much higher yields make fixed income more attractive
- Favor a moderate risk-on stance, focused on credits with durable free cash flows and solid balance sheets across a wide range of sectors
- Credit spreads are poised to widen in the coming months, likely presenting more attractive entry points for risk taking
- Diversified overweight to spread sectors with an up-in-quality bias
- Currently see some attractive opportunities in preferreds and BB rated high yield and senior loans
- Advocate deep research, favoring idiosyncratic stories with positive long-term growth prospects
2023 municipal market themes
Municipal bond market
Economic environment
- Inflation has come down sharply in recent months, and the trajectory is favorable due to lower energy prices, housing cost and rents. Core services inflation excluding housing remains sticky and elevated.
- The fed funds rate has risen by 500 bps during this cycle. Federal Reserve policy remains dependent on employment and inflation data. We do not expect rate cuts for the balance of 2023 as the Fed contends with elevated core services inflation
- U.S. growth should trend lower as the impact of Fed policy is absorbed. Key factors include interest rate hikes, headwinds in the banking sector and declining money supply. Recession is a concern, though the timing continues to move later.
- Uncertainty regarding the end of Fed rate tightening continues to cause rate volatility. Anticipate a return to range bound trading once stable conditions return.
Municipal market environment
- Credit remains strong, with historic levels of rainy day funds. Revenue collections are solid but are expected to normalize from peaks experienced during Covid19. We expect municipal defaults will remain low, rare and idiosyncratic.
- Supply remains muted due to higher interest rates. Net negative tax-exempt supply will likely persist through the summer, providing technical support. Demand is returning for intermediate, long duration and high yield, which offer attractive yields.
- Municipal performance is expected to improve as interest rates stabilize and inflows return. Absent a meaningful catalyst, municipals can still post attractive returns based on elevated income generation from adjusted rates. Long-term tax-exempt and taxable municipal valuations are attractive on a spread basis, compared to similar maturity U.S. Treasuries and corporate bonds.
- Absent a meaningful catalyst, municipals can still post attractive returns based on elevated income generation from adjusted rates.
Finding opportunities in fixed income markets can be challenging. Unless you know where to look. Download our key municipal and global fixed income charts to learn more.
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Endnotes
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 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. Past performance is no guarantee of 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.
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, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Preferred securities are subordinated to bonds and other debt instruments in a company’s capital structure and therefore are subject to greater credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Asset-backed and mortgage-backed securities are subject to additional risks such as prepayment risk, liquidity risk, default risk and adverse economic developments. The value of convertible securities may decline in response to such factors as rising interest rates and fluctuations in the market price of the underlying securities. Senior loans are subject to loan settlement risk due to the lack of established settlement standards or remedies for failure to settle. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk.
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.
Nuveen Asset Management, LLC is a registered investment adviser and an investment specialist of Nuveen, LLC.
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