Key takeaways
- The power of higher income generation helped muni bonds absorb an increase in long-term Treasury yields.
- Investors are recognizing that lengthening duration may benefit portfolios in the short-term should yields move lower.
- The muni bond market is starting the second quarter with relative strength, supported by above-average yields and positive technical and fundamental factors.
In the first quarter, the municipal bond market displayed relative strength in the face of rising Treasury yields. The U.S. economy remains strong, and municipal credit fundamentals are benefiting from a resilient consumer and strong labor market. Demand for tax-exempt income has led to relative outperformance for municipal bonds. We believe demand could strengthen as investors consider shifting to longer duration municipals ahead of U.S. Federal Reserve rate cuts.
Investors may enjoy attractive total returns from income alone.
Endnotes
Sources
Gross Domestic Product: U.S. Department of Commerce. Treasury Yields and Ratios: Bloomberg (subscription required). Municipal Bond Yields: Municipal Market Data. Open-end fund flows: Investment Company Institute. Municipal Issuance: Seibert Research. Defaults: Municipals Weekly, Bank of America/Merrill Lynch Research. State Revenues: The Nelson A. Rockefeller Institute of Government, State Revenue Report. State Budget Reserves: Pew Charitable Trust. Global Growth: International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD). Standard & Poor’s and Investortools: http://www.invtools.com/. Flow of Funds, The Federal Reserve Board: http://www. federalreserve.gov/releases.pdf. Payroll Data: Bureau of Labor Statistics. Bond Ratings: Standard & Poor’s, Moody’s, Fitch. New Money Project Financing: The Bond Buyer. State revenues: U.S. Census Bureau.
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. Nuveen is not a tax advisor. 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. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Nuveen, LLC provides investment solutions through its investment specialists.
This information does not constitute investment research as defined under MiFID.
FAQs
iShares National Muni Bond ETF (MUB)
As expected, MUB has an overall excellent credit rating, with 13.3% of its portfolio rated A, 58% rated AA and 24.6% rated AAA. Many of its issuers are classified as either state or local tax-backed, with some issued from public utilities, transportation or educational institutions.
Are municipal bonds better than CDs? ›
Key Takeaways. In general, tax-exempt municipal bonds (munis) are more attractive to those in higher tax brackets. To compare municipal bonds to taxable bonds, you need to determine the tax-equivalent yield of the muni. Though certificates of deposit (CDs) carry less risk, municipal bonds have tended to outperform them ...
Are municipal bonds worth it? ›
Benefits of Municipal Bonds
Along with these tax benefits, municipal bonds also provide steady, predictable income, making them a viable choice for income-focused investors. Moreover, they help to uplift local communities through infrastructure development and job creation, fostering a sense of societal contribution.
How to evaluate municipal bonds? ›
When considering the purchase of a municipal bond, an important consideration is a state or local government's ability to meet its financial obligations. The likelihood that the bond's issuer will fail to meet the requirements of timely interest payment and repayment of principal to investors is called default risk.
Does MUB pay monthly dividends? ›
MUB Dividend Information
MUB has a dividend yield of 2.80% and paid $2.99 per share in the past year. The dividend is paid every month and the last ex-dividend date was May 1, 2024.
What are the highest paying municipal bonds? ›
Here are the best High Yield Muni funds
- VanEck Short High Yield Muni ETF.
- VanEck High Yield Muni ETF.
- SPDR® Nuveen Blmbg Hi Yld Muncpl Bd ETF.
- VanEck CEF Municipal Income ETF.
- JPMorgan High Yield Municipal ETF.
- BlackRock High Yield Muni Income Bd ETF.
- Franklin Dynamic Municipal Bond ETF.
Sometimes municipal bonds are issued in minimum denominations that are considerably larger, such as $25,000 or $100,000, to target the bonds to institutional investors. Municipal bonds also may be issued in a minimum denomination of $1,000 to attract local or regional investors.
Which bonds to buy in 2024? ›
Our picks at a glance
| Fund | Yield | Net expense ratio |
|---|
| American Funds American High-Income Trust Class A (AHITX) | 6.8% | 0.72% |
| American Century High Income Fund Investor Class (AHIVX) | 6.9% | 0.78% |
| Fidelity Capital & Income Fund (fa*gIX) | 6.1% | 0.93% |
| BrandywineGLOBAL – High Yield Fund Class A (BGHAX) | 6.8% | 0.92% |
5 more rowsMay 16, 2024
General obligation (or GO) bonds are issued by state and local governments and are backed by the full faith and credit of the issuer, which in turn uses its taxing authority — that is, collection of income, property and sales tax — to repay the bond obligation.
Why am I losing money on municipal bonds? ›
Municipal bonds, like all bonds, pose interest rate risk. The longer the term of the bond, the greater the risk. If interest rates rise during the term of your bond, you're losing out on a better rate. This will also cause the bond you are holding to decline in value.
Disadvantages of Municipal Bonds
They typically offer lower yields compared to corporate bonds and stocks. This means that investors may earn less income from their investments. And like all bonds, munis are subject to interest rate risk.
Do municipal bonds lose value when interest rates rise? ›
The price and yield (the income return on an investment) of a bond generally have an inverse relationship. In other words, as the price of a bond goes down, the yield goes up and vice versa. Thus, when interest rates rise, a bond's price usually declines because an investor can earn a higher yield with another bond.
Do municipal bonds pay monthly income? ›
Bond interest typically is paid every six months (though some types of bonds work differently); interest on notes is usually paid at maturity. Municipal bonds are subject to the uncertainties associated with any fixed income security, including interest rate risk, credit risk, and reinvestment risk.
How do municipal bonds work for dummies? ›
By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or “principal.” A municipal bond's maturity date (the date when the issuer of the bond repays the principal) may be ...
Do municipal bonds make sense? ›
High-yield munis can make sense relative to high-yield corporate bonds for high-net-worth investors. It's a slightly different story when comparing high-yield munis to high-yield corporates–but only for investors in a higher tax bracket.
Is it a good time to buy municipal bond funds? ›
Attractive absolute yields
Like most other fixed income investments, municipal bond yields have risen significantly since late 2021 and are now at levels that largely haven't been reached during the past decade.
How risky are municipal bond funds? ›
Between 1970 and 2022, the cumulative 10-year default rate averaged over that time period was just 0.15%. This includes not only higher rated municipal bonds, but lower grade ones as well. This is why municipal bonds are classified as low-risk investments.
Can you lose money investing in municipal bonds? ›
Interest rate risk.
U.S. interest rates have been low for some time. If they move higher, investors who hold a low fixed-rate municipal bond and try to sell it before it matures could lose money because of the lower market value of the bond.
