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Chart talk: Opportunities in municipal bonds and global fixed income
The what, why and how of the municipal and global fixed income markets
Key 2022 themes
Municipal bond market
- The path of inflation will be the wild card for 2022, although the Federal Reserve is focused on combating inflation.
- The Fed has accelerated the pace of tapering to conclude earlier in 2022 and is hinting at a first rate hike as early as March. There could be as many as four rate increases this year, with additional hikes expected through 2024.
- Peak economic expansion is behind us, but growth remains strong as the economy continues to normalize.
- The pared-down $1.2 trillion Infrastructure Bill passed in late 2021. Additional fiscal stimulus is possible, but at much lower levels than over the last two years.
- Net supply of tax-exempt municipals may be limited, and supply has been easily absorbed amid strong demand. Taxable municipal supply is likely to remain robust, following a similar path as 2021.
- Municipal credit showed resilience through the downturn and has rebounded strongly, bolstered by increased tax receipts and trillions of dollars of federal support.
- COVID-19 and its variants can impact global growth, although outbreaks are not likely to cause broad shutdowns in the United States or negatively affect municipal credit.
- In an environment with volatile interest rates and strong credit conditions, we expect high yield municipal bonds will continue to outperform in 2022.
The evolving fixed income market environment Key 2022 themes
- U.S. economic expansion continues, but pace to slow
- Global growth remains above trend
- Central banks remain accommodative, but reducing extraordinary measures
- Fiscal policy support diminishes
- As the global economy heals and policy accommodation is reduced, expect rates to gradually rise
- Diversified overweight to spread sectors with preference for credit risk over duration risk
- Given full valuations, credit selection will be key
- Advocate deep research, favoring idiosyncratic stories with positive long-term growth prospects
- Low defaults and strong fundamentals benefit credit sectors
- Income to drive performance as valuations unlikely to significantly improve
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.
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.
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