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Market conditions present a compelling entry point for taxable municipal bonds. Yields remain historically attractive, driven by heavy issuance and federal policy uncertainty, while a steepening yield curve offers opportunistic duration extension. Looking ahead, reduced summer issuance, combined with strong reinvestment demand and robust fundamentals, should create favourable conditions, potentially offering a sunnier disposition heading into fall.
Key takeaways
- Market dynamics: Technical factors including increased issuance have caused taxable municipals to underperform other fixed income sectors, raising yields and creating relative value opportunities.
- Attractive entry point: Taxable municipal yields ended the second quarter at 4.99%, equal to that of U.S. corporates. Municipal yields have not equaled or exceeded corporate yields since 2021. This yield parity creates an attractive entry point given taxable municipals’ stronger credit profile compared to corporates, with over 75% of the Bloomberg Taxable Municipal Index rated AA- or better.
- Higher education trends: The higher education sector experienced heightened issuance as institutions sought financing amid federal policy uncertainties. Issuance should normalize once policy implications become clearer.
- Seasonal factors: Increased reinvestment demand from July and August maturities and calls, combined with typical summer supply reduction, may lead to stronger performance to start the second half of the year.
- Credit selection: As sector-specific challenges widen the gap between stronger and weaker credits, careful security selection becomes increasingly important for portfolio performance.
- Tax policy: Previously proposed Section 899 of the One Big Beautiful Bill Act (OBBBA), intended to increase U.S. income tax and withholding tax rates from “discriminatory foreign countries,” was removed from the final legislation.
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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.
This information does not constitute investment research as defined under MiFID.
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