An active approach to diversified tax-exempt income
Nuveen's forward-thinking approach to portfolio construction leverages 120 years as a leader in the municipal bond industry to help achieve outcomes that align with investors’ tax-exempt income objectives while seeking to minimize downside risk.
- U.S. Treasury rates pulled back in the second quarter of 2021, with the 10-year declining almost 30 basis points. Despite that, we continue to expect Treasury rates to gradually rise.
- AAA municipal/U.S. Treasury yield ratios (“ratios”) increased slightly but have stayed around the 60-70% range. We believe this represents fair value after taxes and may be the new normal for ratios going forward, at least in the near-term.
- High yield municipal credit spreads continued to contract during the quarter, getting down to their pre-coronavirus levels, and in many cases even lower (below 200 basis points). While we believe spreads will remain at these low levels for the foreseeable future, we do not anticipate significant further tightening.
- With respect to recent portfolio changes, we lowered duration across the portfolios given the continued municipal curve flattening, causing the short-end of the municipal curve to appear more attractive compared to longer-dated maturities. We also lowered our exposure to high yield municipals in the moderate and high income portfolios given how rich credit spreads are from a historical perspective and our belief that spreads will not significantly tighten further. The Conservative portfolio shifted exposure from intermediate duration municipals to limited term. The Moderate portfolio reduced its exposure to long-dated high yield municipals and intermediate duration investment grade in favor of limited term, short duration high yield, and long-dated investment grade. The net effect of this reallocation is a shorter duration profile and less exposure to high yield municipals. The High Income portfolio reduced exposure to short duration high yield municipals, intermediate investment grade, and long-dated high yield in order to establish a position in limited term and increase exposure to long-dated investment grade. The net effect of this reallocation is also a shorter duration profile and less overall exposure to high yield municipals.