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.
- During the third quarter, the Federal Reserve raised the Fed Funds rate by 75 bps in July and September. This led to the front end of the yield curve to rise by more than the belly (middle) and long end of the curve. The 2-year yield rose by 133 bps, while the 10- and 30-year yield rose by 82 and 59 bps. In September, the Fed’s dot plot was revised to an additional 125 bps of rate hikes by year end.
- AAA municipal/US Treasury ratios (“ratios”) rose at the front and long end tenors, while they declined across the belly of the curve. The 2-year ratio rose by 6% and finished the quarter at 72%. The 30-year ratio moved range bound between 95% and 105% and ended the quarter at 104%. This is leading to the municipal curve to be much steeper than the treasury curve.
- With respect to recent portfolio changes, we focused on managing duration risk in anticipation of an aggressive rate hiking cycle, while reducing credit risk. Several of the underlying funds had a modest increase in duration over the quarter. With the expectations for rate hikes, the team made modest decreases to higher duration funds in favor of lower duration funds. This resulted in the models having a similar duration profile compared to the beginning of the quarter.
- In the conservative portfolio, intermediate duration was reduced, while adding to limited term. In the moderate portfolio, high yield and All-American was reduced and exposure to intermediate duration rose. High yield spreads modestly rose over the quarter but remain in line with the long-term average, we continue to have a neutral stance on credit. The neutral view on credit, while trying to balance duration, led to a reduction in the high yield and intermediate duration funds for short duration high yield and All-American in the high income model.