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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
Themes/predictions for 2021
Municipal bond market
- 2021 will be a transition year as we seek an end to the coronavirus outbreak. The path to normalization will be long but ultimately successful.
- The Federal Reserve and U.S. Treasury will work together to support the markets, benefiting municipals.
- Monetary stimulus and low rates should boost economic activity as conditions stabilize.
- Inflation will remain low as labor productivity increases.
- Treasury yields will increase moderately, but the effect on municipals will be cushioned by yield spreads and the scarcity of tax-exempt bonds in light of a growing proportion of taxable municipals.
- The importance of the underlying municipal projects typically stabilizes the underlying credit for the investor.
- Downgrades and defaults will be lower than expected, and clarity on credit health will lift investor confidence.
Global fixed income market
- The U.S. economy continues to recover, and growth is expected to build through the year.
- Global growth is strong, but uneven and led by China.
- Central banks remain extraordinarily accommodative.
- Fiscal policy supports growth.
- We prefer diversified overweight to spread sectors with a focus on mid-quality credit assets.
- Given somewhat stretched valuations and a still-uncertain pandemic outlook, credit selection will be key.
- We advocate deep research and favor idiosyncratic stories with positive long-term growth prospects.
- Declining default forecasts and improving fundamentals should benefit credit sectors.
- Income should drive performance as valuations are unlikely to improve significantly.
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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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Investing in municipal bonds and a municipal bond investment vehicle involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. In addition, the callability of bonds may increase interest rate risk exposure in the Laddered portfolios. Upon call, a client may be confronted with a less favorable interest rate environment than the one that existed when the original bond was purchased. 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. Nuveen Asset Management is not a tax advisor. Consult your professional advisors before making any tax or investment decisions. This information should not replace a client’s consultation with a professional advisor regarding their tax situation. High yield or lower-rated bonds and municipal bonds carry greater credit risk, and are subject to greater price volatility. Preferred securities are subordinate to bonds and other debt instruments in a company’s capital structure and therefore are subject to greater credit risk. Certain types of preferred, hybrid or debt securities with special loss absorption provisions, such as contingent capital securities (CoCos), may be or become so subordinated that they present risks equivalent to, or in some cases even greater than, the same company’s common stock. There are specific risks associated with international investing, which include but are not limited to foreign company risk, adverse political risk, market risk, currency risk and correlation risk. In addition, investing in securities of developing countries involves greater risk than, or in addition to, investing in developed foreign countries.
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