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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
Economic environment
- 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.
Portfolio positioning
- 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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Endnotes
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. Past performance is no guarantee of 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.
This information does not constitute investment research as defined under MiFID. In Europe this document is issued by the offices and branches of Nuveen Real Estate Management Limited (reg. no. 2137726) or Nuveen UK Limited (reg. no. 08921833); (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3BN), both of which entities are authorized and regulated by the Financial Conduct Authority to provide investment products and services. Please note that branches of Nuveen Real Estate Management Limited or Nuveen UK Limited are subject to limited regulatory supervision by the responsible financial regulator in the country of the branch.
Glossary
The Alternative Minimum Tax (AMT) was originally enacted to ensure that all taxpayers pay their fair share of the costs of government. Determining if a taxpayer is subject to AMT requires tax liability be calculated twice: first using the regular tax rules and then a second time using the AMT rules. Only if the AMT calculation produces a higher tax liability than the regular tax rules, is a taxpayer subject to the Alternative Minimum Tax. Sharpe Ratio (Risk-Adjusted Return) is a risk-adjusted return measure calculated using standard deviation and excess return to determine reward versus unit of risk. The higher the Sharpe Ratio, the better the historical risk-adjusted performance. Standard Deviation (Risk) is a statistical measure of the historical volatility of a mutual fund or portfolio; the higher the number, the greater the risk. Senior Loan is a loan that takes priority over other debts of the issuer.
Additional disclosuresThe comments and statements made are based solely upon the opinions of Nuveen Asset Management and the data available at the time of publication, which may change without notice. There is no assurance that any predicted results will actually occur. This brochure is provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Certain information was obtained from third-party sources, which we believe to be reliable, but is not guaranteed. Nuveen Asset Management, LLC (“NAM”) seeks to expeditiously and efficiently effect sales of legacy securities contributed to new or existing accounts or in connection with termination and liquidation instructions, generally by directing the execution of sale to the relevant broker-dealer/custodian designated by the client’s managed account program, subject to program limitations.
Primarily due to the time constraints and lot sizes applicable to these transactions, and because the full range of trading techniques is generally not available (including aggregation), the prices received in these transactions may be less favorable than the prices that could be attained for sales of securities selected by NAM as part of ongoing management. Clients always reserve the right to fund accounts with cash as opposed to legacy securities and to keep any securities in their accounts upon termination of services.
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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