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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 2023 themes
Municipal bond market
- Inflation has come down sharply in recent months, and the trajectory is favorable. Energy prices, housing costs and rents continue to trend lower, which should exert downward pressure on inflation going forward.
- The fed funds rate has risen by 500 bps during this cycle. Federal Reserve policy remains dependent on employment and inflation data.
- 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 continues to be a concern.
- Concerns around banking and political gridlock are causing rate volatility. Anticipate a return to range bound trading once stable conditions return.
Municipal market environment
- Long-term tax-exempt and taxable municipal valuations are attractive on a spread basis, compared to similar maturity U.S. Treasuries and corporate bonds. Municipal performance should improve when interest rates are more stable and fund flows return.
- Supply remains meaningfully low due to higher interest rates. Net negative tax-exempt supply will likely persist, providing technical support. Municipal supply will be driven by new issuance for new projects, rather than refunding. Demand is returning, attracted by higher yields and potential tax increases.
- Credit remains strong, with historic levels of revenue collections and rainy day funds. Attractive spreads plus sound credit conditions offer an appealing entry point. We expect municipal defaults to remain low, rare and idiosyncratic.
The evolving fixed income market environment Key 2023 themes
- U.S. growth to weaken
- Global slowing, but downside risks to moderate
- End to central banks’ tightening nears
- Fiscal policy support diminishing
- 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 likely to widen during the year, presenting opportunity to add risk given solid credit fundamentals
- Diversified overweight to spread sectors with an up-in-quality bias
- Advocate deep research, favoring idiosyncratic stories with positive long-term growth prospects
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.
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.
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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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