09/09/2024 | News release | Distributed by Public on 09/09/2024 12:23
Municipal bonds are having a strong year and remain one of our favorite asset classes in the current market environment. We're particularly constructive on high yield municipals, which have returned +6.5% year-to-date through August, as measured by the Bloomberg High Yield Municipal TR Index. With a taxable-equivalent yield of 8.9% (for those in the top income tax bracket), high yield munis offer an attractive source of income. We see three other potential drivers of compelling muni performance in the near-to-medium term:
The electoral calendar: The municipal asset class has historically performed well after U.S. Election Day. Figure 2 shows the average return for both investment grade and high yield munis for the one-year postelection period over the past seven election cycles.
Fed rate cuts: We anticipate a total of 75 bps worth of cuts between now and year-end - with more to come in 2025. Investors with large cash allocations have the opportunity to rotate into fixed income sectors to lock in attractive starting yields, if they haven't already done so. Cash yields are poised to decline as the Fed lowers its policy rate. Meanwhile, the municipal yield curve is positively sloping, and investors are being rewarded for extending duration. High yield munis generally have longer durations than their investment grade counterparts, allowing investors to take advantage of higher yields further out on the curve. During the most recent rate-cutting cycle (2019), investment grade and high yield municipals returned +3.3% and +5.6%, respectively, in the six months following the first cut.
Sound fundamentals: The current municipal landscape is built on a solid foundation. About 75% of the high yield municipal bond index, for example, is made up of higher-quality (BB rated) issues. Default rates for these BB rated municipals are roughly equal to those of investment grade (BBB rated) corporate bonds. This attractive fundamental backdrop is complemented by favorable supply and demand factors: According to Lipper, flows into high yield municipal bond funds totaled $9.9 billion year-to-date through August. That amount represents more than 50% of all municipal fund flows in 2024, exceeding the typical 15% to 20% amount. On the supply side, we expect municipal issuance to slow from its current pace. We believe new issues will remain oversubscribed, reflecting continued robust demand.
Nuveen's Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer: