municipal market update
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NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Municipal market update
30 April 2022
2Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
• The path of inflation remains the wild card for 2022, with further uncertainty posed by geopolitical events. The Federal Reserve is focused on combating inflation.
• The Fed has completed two interest rate hikes in 2022, and more are expected throughout the year.
• Peak economic expansion is behind us, but growth remains strong as the economy continues to normalize.
• Municipal bond supply is expected to be flat to modestly down.
• Technical factors are driving negative municipal returns year-to-date; fundamentals remain sound.
• Credit fundamentals are strong; revenue collections and reserves are the highest in decades.
• Covid-19 outbreaks are more regionalized and broad shutdowns are unlikely.
• In an environment with volatile interest rates and strong credit conditions, we expect high yield municipal bonds to outperform relative to investment grade municipals.
2022 municipal market themes
Certain statements may be deemed forward-looking statements. Please note that any such statements are not guarantees or intended to constitute a prediction of any future performance; actual results or developments may differ materially from those projected.
3Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Rate hikes:
• As expected, the Fed hiked rates by 25 bps in March and 50 bps at the May FOMC meeting
• We expect two more 50 bps hikes, at the June and July meetings, followed by three 25 bps hikes at subsequent meetings
Balance sheet reduction:
• Formal announcement in May as expected, setting up June start date
• Consistent with expectations, maximum monthly runoff capped at $60B in Treasuries and $35 billion in MBS per month
Fed is reducing monetary policy accommodation
Data sources: Bloomberg; Federal Reserve Projection Materials. Fed funds rate as of 4 May 2022 and Fed forecasts as of 16 Mar 2022. Fed forecast represents the median forecast of each Federal Open Market Committee participant for the midpoint of the fed funds rate at year ends 2022, 2023, 2024 and longer run. Month 0 shows first rate increase. A basis point is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).
Path of fed funds target rate compared to past cycles
+300 bps
+175 bps
+425 bps
+225 bps
+75 bps
1.9%
2.8% 2.8% 2.4%
0%
1%
2%
3%
4%
5%
6%
7%
8%
0 6 12 18 24 30 36 42 48 LongerRun
Fed
fu
nd
s r
ate
Months after initial tightening
1994 Cycle 1999 Cycle 2004 Cycle 2015 Cycle Current Cycle Fed Forecast
We think Fed policy will operate on two axes:
4Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Impending Fed tightening is already well-anticipated by markets
Data sources: Federal Reserve Board, Bloomberg, as of 31 Mar 2022. Data source: Bloomberg, as of 31 Mar 2022.
Markets are already pricing in rate hikes, and runoff historically led to flatter curves• Futures markets and front-end rates already incorporate Fed rate hikes, including even more near-term hikes than the FOMC’s latest
projections
• Historically, the yield curve flattened during the period of balance sheet runoff, and the level of yields ultimately fell after an initial increase during the first stage of the policy
Markets are expecting more rate increases Yields ultimately fell and curves flattened during balance sheet runoff
▬ FOMC median dots ▬ Market pricing ▬ 10y yield (lhs) ▬ 2y10y curve (rhs)
-50
0
50
100
150
200
250
300
350
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
QE2 QE3 RUNOFF QE4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Ma
r-22
May-2
2
Jul-2
2
Se
p-2
2
Nov-2
2
Jan
-23
Ma
r-23
Ma
y-2
3
Jul-2
3
Se
p-2
3
Nov-2
3
Jan
-24
Ma
r-24
Ma
y-2
4
Jul-2
4
Se
p-2
4
Nov-2
4
Jan
-25
Ma
r-25
Ma
y-2
5
Jul-2
5
Se
p-2
5
Nov-2
5
5Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Expect modest further yield increases, and the curve should stay relatively flat.
Interest rates will rise, but remain contained
Data sources: www.treasury.gov; Nuveen estimates, Data and estimates as of 31 Mar 2022.
1.58%1.69%
1.92%
0.13%
0.36%
0.93%
2.28%2.42%
2.32%
2.65%
2.80% 2.80%2.75%
2.90% 2.90%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2 Year 5 Year 10 Year
31 Dec 2019
31 Dec 2020
31 Mar 2022
30 Jun 2022 est.
31 Dec 2022 est.
Treasury yields
6Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
3.2
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Yie
ld (
%)
U.S. Treasury rates are exhibiting more volatility
Data source: U.S. Department of the Treasury, 30 Apr 2022. Past performance is no guarantee of future results.
Years to maturity
Treasury rates have been unpredictable after hitting an all-time low in 2020.
30 Apr 2022
04 Aug 2020
Parts of the Treasury yield curve have now inverted, caused by concerns over inflation, rising rates and geopolitical events.
7Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Markets are concerned about inflation and a more aggressive Fed rate increase cycle
Data sources: U.S. Department of the Treasury; Refinitiv MMD, 30 Apr 2022. Past performance does not predict or guarantee future results. AAA municipals represented by Municipal Market Data (MMD) scale.
0.00
0.40
0.80
1.20
1.60
2.00
2.40
2.80
3.20
3.60
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Yie
ld (
%)
U.S. Treasury
AAA municipal bonds
U.S. Treasuries vs. AAA-rated G.O. municipal yield curve
Years to maturity
The municipal yield curve is upward sloping and has shown less volatility than Treasuries.
8Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
50%
80%
110%
140%
170%
200%
230%
260%
290%
320%
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
10-year MMD/UST ratio
10-year ratio average
30-year MMD/UST ratio
30-year ratio average
2020 ratios
60%
120%
180%
240%
300%
1/20 3/20 5/20 7/20 9/20 11/20
Data source: Refinitiv MMD for fair value Municipal 10- and 30-Year Index AAA General Obligation bonds; Bloomberg for 10- and 30-year U.S. Treasury yields, 01 Jan 1984 – 30 Apr 2022. Represents the relative value of municipal yields to Treasury yields. Past performance is no guarantee of future results.
Municipal-to-Treasury ratios are attractive; elevated ratios near 100% present opportunity
AAA municipal’s value relative to Treasuries
Average ratios since 1984
30-year bond ratio: 93%10-year bond ratio: 85%
Current 30-year: 103%
Current 10-year: 94%
9Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
An infusion of federal stimulus funds and solid revenue collections have led to improving outlooks.
Rating agency outlooks are brighter
Data source: Moody’s, 31 Dec 2021.
Category Sector 2022 Moody’s outlook 2020 Moody’s outlook
Transportation Airport Positive Negative
Mass transit Stable Negative
Public ports Positive Negative
Toll roads Positive Negative
Higher education Privates Stable Negative
Publics Stable Negative
Community colleges Stable Stable
General obligation State governments Stable Negative
Local governments Stable Negative
Utilities Public power Stable Stable
Water/Sewer Stable Stable
Health care Not for Profit Hospitals/Health care Negative Negative
Other Housing Stable Stable
Not for profit Stable Negative
10Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
-120-100-80-60-40-20
0204060
Feb-20 Aug-20 Feb-21 Aug-21 Feb-22
Activity is returning to pre-Covid times
Stadium attendance (average)
Data sources: Chart 1: ESPN; Top 5 NCAA Capacity Stadiums refer to University of Michigan, Pennsylvania State University, The Ohio State University, Texas A&M University and University of Alabama, 31 Dec 2021; Chart 2: census.gov, 31 Dec 2021; Chart 3: Transportation Security Administration (TSA), 30 Apr 2022; Chart 4: OpenTable, 18 Feb 2020 – 30 Apr 2022.
0
100
200
300
400
500
600
Q116
Q117
Q118
Q119
Q219
Q319
Q419
Q120
Q220
Q320
Q420
Q121
Q221
Q321
Q421
Total Sales Income
State & local government tax revenue collections ($ billions)
0
5,000
10,000
15,000
20,000
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22
TSA passenger checkpoints Seated diners (% change from 2019)
0
40,000
80,000
120,000
2019 2020 2021
NFL stadiums NCAA largest 5 stadiums
11Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
0
100
200
300
400
500
600
700
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Basis
po
ints
HY - AAA
HY - AAA average
Pre-crisis average
High yield credit spreads have been stable since the beginning of the year
Data source: Bloomberg, Refinitiv MMD, 31 Oct 1995 – 30 Apr 2022. Chart shows data to the earliest period available. Pre-crisis period is 31 Oct 1995 – 31 Dec 2007. Past performance does not predict or guarantee future results. High yield municipal yields represented by the Bloomberg High Yield Municipal Index; AAA municipal yields represented by Municipal Market Data (MMD) yields for AAA rated 20-year bonds. High yield or lower-rated bonds and municipal bonds carry greater credit risk, and are subject to greater price volatility. Ratings shown are from S&P and are subject to change. AAA,AA,A, and BBB are investment grade ratings; BB,B, CCC/CC/C and D are below-investment grade ratings. Different benchmarks, economic periods, methodologies and market conditions will produce different results.
Bloomberg High Yield Municipal Index versus AAA yields
HY – AAA spread average: 254 bps
Pre-crisis average: 190 bps
195 bps
12Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
1.00.5
1.10.5
0.9 0.9 0.21.6
3.44.3
2.43.8
2.8
1.52.3
1.80.8
2.31.3
2.2 2.1
0.3
$0
$5
$10
$15
$20
$25
$30
$35
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022YTD
Mu
nic
ipa
l p
aym
en
t d
efa
ult
s (
$ b
illi
on
s)
27.8
22.7
Defaults remain in line with historical trends
Data sources: Bank of America/Merrill Lynch Research, 29 Apr 2022, default data as of 31 Mar 2022. Data represents defaults on the entire universe of bonds, both rated and unrated, and includes Puerto Rico defaults.
Market total
Excluding Puerto Rico
Puerto Rico
Municipal payment defaults
Nursing homes and industrial development bonds accounted for 64% of defaults in 2020 and 75% in 2021.
13Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Municipal recovery rates are significantly higher than corporates
1 Municipal average weighted recoveries shown since 1970, and corporate average weighted recoveries since 1987.
2 Puerto Rico includes COFINA recovery. Other debt, including retiree benefits, is not yet determined under Commonwealth Plan of Adjustment (POA). Puerto Rico GO bonds were exchanged on 15 March 2022. Recovery will depend on performance of sales tax.
Data source: Moody’s Investors Service, 25 Feb 2016; U.S. Municipal Bond Defaults and Recoveries, 1970 – 2020, 09 Jul 2021. Past performance does not predict or guarantee future results.
Municipal average weighted recoveries have been 68%, as compared to recoveries for corporates of 47%.1 Retirees with pensions have priority in municipal recoveries.
0%
20%
40%
60%
80%
100%
Central Falls, RI Vallejo, CA Jefferson County,AL
Harrisburg, PA Stockton, CA Detroit, MI San Bernardino,CA
Puerto RicoCOFINA
Reco
very
level
Debt
Pensions
Other Post-EmploymentBenefts (OPEBs)
Recoveries in large municipal bankruptcies
2
14Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Municipal bonds have historically defaulted at rates lower than equivalently rated corporates
1 Data source: Moody’s Investors Service, U.S. Municipal Bond Defaults and Recoveries, 1970 – 2021, 21 Apr 2022. Past performance does not predict or guarantee future results. The universe for the study represents approximately 12,500 fundamental U.S. public finance ratings from Moody’s.
Moody’s average cumulative default rates
Municipals vs. corporates, 1970-20211
YEAR 5 YEAR 10
Rating Corporate Municipal Difference Corporate Municipal Difference
Aaa 0.08% 0.00% 0.08% 0.35% 0.00% 0.35%
Aa 0.28% 0.01% 0.28% 0.76% 0.02% 0.74%
A 0.68% 0.03% 0.65% 1.96% 0.10% 1.86%
Baa 1.38% 0.46% 0.92% 3.45% 1.06% 2.38%
Ba 7.42% 1.88% 5.55% 14.78% 3.40% 11.38%
B 20.12% 11.67% 8.45% 33.42% 16.70% 16.73%
Caa-C 33.66% 19.04% 14.62% 49.04% 23.71% 25.33%
15Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Puerto Rico emerges from bankruptcy
1 Other Clawback Entities (Pre-PROMESA): Mediation ongoing; claims include ~$2 billion PRIFA and ~$420 million CCDA and MBA. 2 Commonwealth (Pre-PROMESA): Includes GO/PBA claims of $19 billion, General Unsecured Claims ~$5 billion, ERS ~$3 billion. 3 PREPA (Post-plan): Still in process. PREPA is not yet restructured and is currently subject to executing the 2019 PREPA RSA. Assuming maximum haircut of 32.5% as contemplated in May 2019 PREPA RSA.
Data sources: Puerto Rico Fiscal Agency & Financial Advisory Authority, Fact Sheet – Plan of Adjustment – Amended POA, based on POA 1 Jan 2022; The Bond Buyer. “As Plan of Adjustment becomes effective, restructured Puerto Rico debt hits market.” 16 Mar 2022. POA data excludes pensions. HTA: Highways and Transportation Authority, PREPA: Puerto Rico Electric Power Authority, PRASA: Puerto Rico Aqueduct and Sewer Authority, GDB: Government Development Bank, COFINA: Sales Tax-Backed Bonds. Corporacion del Fondo de Interes Apremiante de Puerto Rico, PBA: Public Building Authority, PRIFA: Puerto Rico Infrastructure Financing Agency, ERS: Employee Retirement System, RSA: Restructuring Support Agreement.
• Direct debt obligations reduced to $7 billion from $34 billion. New GO bonds benefit from enhanced security pledge.
• CVI holders may benefit from outperformance in sales tax collections.
• New debt management policy limits Puerto Rico’s ability to overleverage in the future.
• Plan of Adjustment requires pension reform measures and established new pension reserve trust with annual funding requirements.
• The Puerto Rico Electric Power Agency (PREPA) and Highway and Transportation Authority (HTA) remain in bankruptcy.
Plan of Adjustment: before and after
18
12
5
3
5
5
9
6
27
7
6
1
0
10
20
30
40
50
60
70
Pre-PROMESA Obligations 2021: Post-Plan Obligations
Ob
lig
ati
on
s (
$ b
illi
on
s)
Other Clawback Entities
HTA
Commonwealth
PREPA
PRASA
GDB
COFINA
722
1
2
3
34
On 15 March 2022, bondholders exchanged legacy bonds for new GO debt, a cash consideration and Contingent Value Instrument (CVI).
16Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
$0
$100
$200
$300
$400
$500
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022YTD
To
tal
mu
nic
ipa
l is
su
an
ce (
$ b
illi
on
s)
Municipal supply is restrained, and Fed rate increases may further limit supply
Data source: Securities Industry and Financial Markets Association (SIFMA.org), U.S. Bond Market Issuance and Outstanding, 04 Apr 2022 for period ending 31 Mar 2022. The average total issuance shown is for the period 01 Jan 2003 – 31 Dec 2021.
$399 B
New tax laws effective in 2018 removed the ability to advance refund bonds at tax-exempt rates, further limiting constrained tax-exempt supply.
Municipal issuance
Tax-exempt issuance ($)
Taxable municipal issuance ($)
Average total issuance
17Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
11.6
8%
5.1
6%
9.6
0%
5.3
1%
4.4
8%
3.5
1% 4.8
4%
3.3
6%
-2.4
7%
12.9
1%
2.3
7%
10.6
9%
6.7
8%
-2.5
5%
9.0
5%
3.3
0%
0.2
5%
5.4
5%
1.2
8%
7.5
4%
5.2
1%
1.5
2%
-8.8
2%
-8%
-3%
2%
7%
12%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022YTD
Municipals have shown resilience during uncertain environments
Data source: Bloomberg, L.P., 30 Apr 2022. The average annualized return shown is for the period 01 Jan 2000 – 31 Dec 2021. Past performance is no guarantee of future results. 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. Index returns include reinvestment of income and do not reflect investment professional and other fees that would reduce performance in an actual client account.
Bloomberg Municipal Bond Index Returns (%)
Terrorist
attacks
Corporate
accounting
scandals
Fed funds rate
raised 17 times
Global
financial
crisis
Debt ceiling
U.S. downgrade
Taper
tantrumFed funds rate increases
Monoline
insurance
downgrade
Municipal
default
scare
4.97%
Average
annualized
return
Covid-19
pandemic
Municipal market volatility has increased since 2007. YTD performance is a result of technical conditions, but fundamentals remain sound.
18Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Municipals have exhibited lower volatility with strong risk-adjusted returns
Data source: Morningstar, period ending 30 Apr 2022. Past performance is no guarantee of future results. Representative Indexes: Treasuries: Bloomberg U.S. 10-20 Year Treasury Index and the Bloomberg U.S. 20+ Year Treasury Index; Global Bonds: Bloomberg Global Aggregate Unhedged Index; High Yield Corporates: Bloomberg High Yield Corporate Index; International Equity: MSCI EAFE Index; Emerging Markets: MSCI Emerging Markets Index; U.S. Equity: S&P 500 Index; High Yield Municipals: S&P Municipal High Yield Index and Investment Grade Municipals: Bloomberg Municipal Bond Index.
-0.4
0.0
0.4
0.8
1.2
U.S. Treasury10-20 Year
U.S. Treasury20+ Year
Global Bonds High YieldCorporates
InternationalEquity
EmergingMarkets
U.S. Equity High YieldMunicipals
InvestmentGrade
Municipals
Sharp
e r
atio
0
5
10
15
20
U.S. Treasury10-20 Year
U.S. Treasury20+ Year
Global Bonds High YieldCorporates
InternationalEquity
EmergingMarkets
U.S. Equity High YieldMunicipals
InvestmentGrade
Municipals
Sta
ndard
devia
tio
n
3 year 5 year 10 year
Municipals have exhibited low volatility among asset classes
Municipals have been relatively attractive on a risk-adjusted basis
19Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
The way rates rise can determine how fixed income may react
Data sources: Bloomberg, www.federalreserve.gov., data indicates changes in fed funds rates. Data shown applies to the actual time periods noted in the table. Past performance does not predict or guarantee future results. One basis point equals .01%, or 100 basis points equal 1%. Different benchmarks and economic periods will produce different results. Other methods and market conditions may result in slightly different outcomes. 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. Each period has its own specific factors that may help or hurt the total returns of bonds. These may be economic in nature or technically driven.
Period 1
04 Feb 1994 to
01 Feb 1995
Period 2
30 Jun 1999 to
16 May 2000
Period 3
30 Jun 2004 to
29 Jun 2006
Period 4
15 Dec 2015 to
19 Dec 2018
Period 5
16 Mar 2022 to
?
Starting rate level 3.00% 4.75% 1.00% 0 to 25 bps 25 bps
Number of hikes 7 6 17 9 2
Duration 12 Months 10 Months 24 Months 36 months ?
Ending rate level 6.00% 6.50% 5.25% 2.50% ?
Magnitude 300 basis points 175 basis points 425 basis points 225 basis points ?
Fed funds rising rate periods rates since 1994
20Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
The way rates rise can affect returns along the yield curve
Data source: Bloomberg L.P. Data shown applies to the actual time periods noted in the table. Past performance does not predict or guarantee future results. Representative Indexes: 1-Year Bonds: Bloomberg 1-Year Municipal Bond Index; 3-Year Bonds: Bloomberg 3-Year Municipal Bond Index; 5-Year Bonds: Bloomberg 5-Year Municipal Bond Index; 10-Year Bonds: Bloomberg 10-Year Municipal Bond Index; 20-Year Bonds: Bloomberg 20-Year Municipal Bond index; 22+-Year Bonds: Bloomberg Long Municipal Bond Index; Municipal Bond Market: Bloomberg Municipal Bond Index. Different benchmarks and economic periods will produce different results. Other methods and market conditions may result in slightly different outcomes. Index returns include reinvestment of income and do not reflect investment professional and/or other fees that would reduce performance in an actual client account. 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. Each period has its own specific factors that may help or hurt the total returns of bonds. These may be economic in nature or technically driven.
Period 1
04 Feb 1994 to
01 Feb 1995
Period 2
30 Jun 1999 to
16 May 2000
Period 3
30 Jun 2004 to
29 Jun 2006
Period 4
15 Dec 2015 to
19 Dec 2018
Bloomberg
Municipal
Index
6-month
return
before
Total
return
during
Change
in yields
during
6-month
return
after
Total
return
across
three
periods
6-month
return
before
Total
return
during
Change
in yields
during
6-month
return
after
Total
return
across
three
periods
6-month
return
before
Total
return
during
Change
in yields
during
6-month
return
after
Total
return
across
three
periods
6-month
return
before
Total
return
during
Change
in yields
during
6-month
return
after
Total
return
across
three
periods
1-year 2.45% 2.06% +204 bps 3.77% 8.50% 1.35% 3.11% +92 bps 2.99% 7.63% 0.28% 3.40% +188 bps 2.08% 5.85% 0.39% 4.96% +109 bps 1.54% 4.90%
3-year 3.35% 0.70% +175 bps 5.22% 9.51% 0.66% 2.43% +80 bps 3.89% 7.12% -0.31% 3.46% +132 bps 2.57% 6.78% 1.00% 6.60% +85 bps 2.43% 6.87%
5-year 4.38% -0.95% +152 bps 6.83% 10.45% -0.21% 1.90% +68 bps 5.02% 6.78% -0.90% 4.76% +77 bps 3.22% 7.16% 2.13%. 9.48% +69 bps 3.82% 10.64%
10-year 6.13% -3.49% +142 bps 8.55% 11.19% -1.73% 1.71% +53 bps 6.92% 6.87% -0.81% 7.81% +30 bps 4.77% 12.05% 3.44% 14.40% +49 bps 5.61% 17.10%
20-year 6.53% -4.91% +128 bps 7.64% 9.03% -1.13% -1.04% +70 bps 8.85% 6.50% -0.18% 12.53% -20 bps 5.52% 18.53% 3.59% 17.36% +53 bps 6.55% 20.37%
22+year 6.73% -6.21% +128 bps 8.29% 8.40% -1.68% -2.68% +75 bps 9.69% 4.95% -1.26% 15.93% -47 bps 6.17% 21.53% 4.20% 18.61% +48 bps 7.31% 22.37%
Yield curve flattened 76 bpsBest performer: 10-year
Yield curve flattened 17 bps Best performer: 1-year
Yield curve flattened 235 bpsBest performer: 22+
Yield curve flattened 61 bpsBest performer: 22+
21Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Staying the course has benefited investors
Since 2008, there have been five periods when municipal yields increased by at least 100 basis points in less than one year.
Taper
tantrum
Global financial
crisisMay 2013 – Sept 2013
2008 2010 2012 2014
Reduced market
liquidity after
collapse of
Lehman Brothers
Strong supply and
prediction of uptick
in defaults and
bankruptcies
Fed tapering, Detroit
bankruptcy filing and
Puerto Rico challenges
Municipal
default scareOct 2010 – Jan 2011
2016 2018 2020
Covid-19
pandemic
Dramatic selloff and
decoupling of
municipals and
Treasuries
Brexit |
U.S. electionJuly 2016 – Dec 2016
Near-historic low yields
after Brexit vote and
U.S. election
Sept 2008 – Oct 2008
Municipal bond market yields as represented by Bloomberg Municipal Bond Index.
Mar 2020
In 2022, we entered another period of municipal market volatility, where anticipated Fed rate increases, inflation concerns and geopolitical events led to rapid municipal yield increases.
22Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
$88,9
75
$93,5
43
$93,2
43
$94,2
86
$89,0
59$
106,5
88
$107,5
90
$102,9
02
$100,2
95
$100,8
92
$101,4
72
$106,0
38
$100,7
04
$99,6
03
$94,8
50
$99,5
00
$106,2
03
$100,2
97
$9
8,7
40
$94,0
82
$95,0
37
$104,4
98
$100,1
35
$97,7
95
$91,4
08
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
After yield spike Staying invested Missed 2 weeks of recovery
Missed 1 month of recovery Missed 3 months of recovery
Missing even the first two weeks of a market rebound resulted in lower rates of recovery
Value of a hypothetical $100,000 portfolio
Portfolios were eventually compensated for patience
Data source: Bloomberg L.P., as of 31 Mar 2020. Data shown applies to the actual time periods noted in the table. Representative Index: Bloomberg Municipal Bond Index. Nuveen analyzed five periods where municipal yields increased by at least 100 basis points in less than one year. Nuveen examined the total return of hypothetical $100,000 portfolios held for 3-, 6-, and 12-month periods following the spike. In this chart, the portfolios were held for 12 months following the spikes. Hypothetical examples are shown for illustrative purposes only and do not represent the performance of an actual portfolio. Individual investor results will vary. Different benchmarks and economic periods will produce different results. Other methods and market conditions may result in slightly different outcomes. Index returns include reinvestment of income and do not reflect investment professional and/or other fees that would reduce performance in an actual client account. Hypothetical results are no guarantee of future results.
Period 1 Period 2 Period 3
01 May 2013 –
05 Sep 2013
12 Oct 2010 –
14 Jan 2011
12 Sep 2008 –
15 Oct 2008
Declined initially as yields rose
Increased if remained fully invested for 12 months
Missed out after markets recovered
What happened to principal value?
Period 4
06 Jul 2016 –
01 Dec 2016
Period 5
09 Mar 2020 –
23 Mar 2020
Principal was recouped in a minimum of 3 months and a maximum of 12 months.
23Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
-$50
-$40
-$30
-$20
-$10
$0
$10
$20
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Net
flo
ws (
$ b
illi
on
s)
Taper
tantrum
Total municipal net flows High yield municipal net flows Significant market events
Total municipal and high yield municipal net fund flows
Covid-19
pandemic
Municipal fund flows have historically returned after market dislocations
Data source: Morningstar Direct, 01 Jan 2007 – 31 Mar 2022, shown monthly. Industry categories: Municipals represent the total of all all municipal bond open-end funds, including high yield; High yield municipals represent all high yield municipal bond open-end funds. Shading represents significant market events.
Global
financial crisis Municipal
default scare Brexit |
U.S. election
24Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Municipals are attractive on an after-tax basis
1 The taxable-equivalent yield is based on the highest individual marginal federal tax rate of 37%, plus the 3.8% Medicare tax on investment income (the Net Investment Income Tax). Individual tax rates may vary.
2 Some income may be subject to state and local taxes and the federal alternative minimum tax.
Data source: Bloomberg L.P., 30 Apr 2022. Past performance is no guarantee of future results. Yields are yield to worst. Yield to worst is the lowest potential yield that can be received on a bond without the issuer defaulting. Taxable-equivalent yield is the yield a taxable investment needs to possess (before taxes) for its yield to be equal to that of a tax-free municipal investment. The yields shown are based on the highest individual marginal federal tax rate of 37%, plus the 3.8% Medicare tax on investment income. Individual tax rates may vary. They do not take into account the effects of the federal alternative minimum tax (AMT) or capital gains taxes. Representative Indexes: Short Term Corporate Bonds: Bloomberg U.S. Government/Credit 1-3 Year Index; Short Term Municipal Bonds: Bloomberg Municipal Short Index; Intermediate Term Corporate Bonds: Bloomberg U.S. Government/Credit Intermediate Index; Intermediate Term Municipal Bonds: Bloomberg Municipal Intermediate Index; High Yield Corporate Bonds: Bloomberg Corporate High Yield 2% Issuer Capped Index; High Yield Municipal Bonds: Bloomberg High Yield Municipal Bond Index. Different benchmarks, economic periods, methodologies and market conditions will produce different results.
2.86%2.54%
3.43%
2.88%
6.99%
4.87%
0%
2%
4%
6%
8%
10%
Corporate Bonds Municipal Bonds Corporate Bonds Municipal Bonds Corporate Bonds Municipal Bonds
Yie
ld
3.36%
4.29%
8.23%
Short term Intermediate term High yield
Taxable yield
Taxable-equivalent yield1
Tax-exempt yield2
Taxable and tax-equivalent yields
Taxable
equivalent
yield
Tax-exempt yield
(100%-marginal tax rate)=
4.86%
1.75%
1.98%
25Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
0
4
8
12
16
20
24
28
32
36
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Deb
t ($
tri
llio
ns
)
U.S. Treasury
Corporate debt
Municipal
U.S. Treasury and corporate debt outstanding has increased, while the amount of outstanding municipal bonds has remained generally flat.
Municipal securities outstanding are not growing as quickly as other fixed income markets
Data sources: SIFMA, Bloomberg, Federal Reserve, U.S. Treasury, 31 Mar 2022 for period ending 31 Dec 2021.
+78%
+211%
+5%
Increase in securities
outstanding
since 2009 (%)
26Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Building individual bond portfolios has become more difficult
Data source: Assets and inventory data from Federal Reserve Flow of Funds ending 10 Mar 2022.
Professional managers can help in an environment of lower inventory.
0
200
400
600
800
1000
1200
0
10
20
30
40
50
60
70
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Munic
ipal m
utu
al f
und a
ssets
($
bill
ions)
Bro
ker/
deale
r m
unic
ipal i
nvento
ry
($ b
illio
ns)
$988 billion (up 161%)
$11 billion (down 83%)
$66 billion
$378 billion
1Q 2008 4Q 2021
MUTUAL FUND ASSETS
BROKER/DEALER INVENTORY
Other factors that support investing with a professional manager:• Sources of liquidity have diminished for individual investors• Municipal assets under management have increased since 2008, adding $610 billion in mutual funds
27Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Outlook
Certain statements may be deemed forward-looking statements. Please note that any such statements are not guarantees or intended to constitute a prediction of any future performance; actual results or developments may differ materially from those projected. Investing involves risk, including possible loss of principal. This information should not be relied upon as investment advice or recommendations. For additional information, please refer to Risks and Important Disclosures provided at the end of this presentation.
• Overall municipal supply may be limited.
• Treasury market volatility has increased, and interest rate volatility is a risk for municipals.
• Municipal-to-Treasury ratios are more volatile, as interest rates between the two markets have decoupled.
• Rapid or unanticipated Fed rate hikes, or other unforeseen events, could increase volatility.
• Inflation has been less contained than originally expected, creating concern for markets and investors.
• Higher yields and interest rate volatility are creating opportunity across various municipal strategies.
• Municipal credit has recovered, and rating agencies have increased their outlook to stable or positive for many holdings and sectors.
• Technical dislocations often attract non-traditional buyers which can support recovery.
• Flexible mandates and strong credit fundamentals support high yield strategies.
• Flexibility regarding curve positioning and credit selection can help long-term outperformance.
Opportunities Challenges
28Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Taxable municipal market
29Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Market trends support investment grade taxable municipals
Data sources: Bloomberg, L.P., Bloomberg indexes, 30 Apr 2022. Past performance is no guarantee of future results. Total returns for a period of less than one year are cumulative.
Returns (%)
Index
Yield to worst
(%)
Spread
(bps)
Effective
duration (years) 1 month QTD YTD 2021
Taxable municipal (AA-) 4.10 108 8.40 -5.35 -8.28 -13.19 0.93
U.S. asset-backed securities (AA+) 3.34 69 2.15 -0.76 -2.88 -3.62 -0.34
U.S. mortgage-backed securities
(AA+)3.59 40 5.60 -3.51 -4.97 -8.31 -1.04
U.S. corporate investment grade
(BBB+)4.30 134 7.64 -5.47 -7.69 -12.73 -1.04
U.S. aggregate bond (AA) 3.47 49 6.40 -3.79 -5.93 -9.50 -1.54
U.S. Treasury (AAA) 2.88 0 6.41 -3.10 -5.58 -8.50 -2.32
Global corporate bonds (BBB+) 3.73 141 6.58 -5.84 -7.44 -12.85 -2.89
Global aggregate (unhedged) (A+) 2.56 48 7.04 -5.48 -6.16 -11.30 -4.71
Characteristics and performance
Technical factors are driving negative returns year to date; fundamentals remain sound.
30Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Taxable municipals have been defensive during Treasury volatility.
Credit spreads
Taxable municipal credit spreads have been more stable than corporate spreads this year
Data source: Bloomberg, L.P., 31 Jan 2018 – 30 Apr 2022. Spread represents option-adjusted spread (OAS). Past performance is no guarantee of future results. Representative indexes: taxable municipals: Bloomberg U.S. Taxable Municipal Bond Index; U.S. corporate bonds: Bloomberg U.S. Corporate Bond Index.
Yield
2018 2019 2020 2021 2022
Basis
poin
ts
Taxable municipals U.S. corporate bonds
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2018 2019 2020 2021 2022
Yie
ld (
%)
Taxable municipals U.S. corporate bonds
31Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Lower credit quality taxable municipal bonds can provide yield premium
Data source: Bloomberg, L.P., 31 Jan 2018 – 30 Apr 2022. Spread represents option-adjusted spread (OAS). Past performance is no guarantee of future results. Representative indexes: taxable municipals: Bloomberg U.S. Taxable Municipal Bond Index; U.S. corporate bonds: Bloomberg U.S. Corporate Bond Index.
AAA-rated spread
A-rated spread
AA-rated spread
BBB-rated spread
0
50
100
150
200
2018 2019 2020 2021 2022
Basis
poin
ts
Taxable municipals U.S. corporate bonds
0
50
100
150
200
2018 2019 2020 2021 2022
Basis
poin
ts
Taxable municipals U.S. corporate bonds
50
100
150
200
250
2018 2019 2020 2021 2022
Basis
poin
ts
Taxable municipals U.S. corporate bonds
50
150
250
350
450
2018 2019 2020 2021 2022
Basis
poin
ts
Taxable municipals U.S. corporate bonds
32Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Small, idiosyncratic deals may provide yield opportunities
Data source: Bloomberg, L.P., 31 Dec 2021. Based on number of deals listed in Bloomberg Deal Calendar.
1831
197 196
72
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Less than $50 million $50 - $100 million $100 - $300 million More than $300 million
Num
ber
of deals
Deal size
Smaller deals comprise the majority of new issuance.
Number of taxable municipal deals by size, 2021
33Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Appendix
34Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Over $6 trillion in federal funds benefit individuals and municipalities, promoting financial and economic recovery and growth.
Significant federal stimulus and infrastructure spending benefits the municipal bond market
Federal stimulus/Spending bills
Date signed into law Funding
Coronavirus Aid, Relief and Economic Security Act (CARES I)
27 Mar 2020 $2.2 trillion (stimulus)
Consolidated Appropriations Act (CARES II) 27 Dec 2020 $900 billion (stimulus)
American Rescue Plan Act (ARPA) 11 Mar 2021 $1.9 trillion (stimulus)
Infrastructure Investment and Jobs Act (IIJA) 12 Nov 2021 $1.2 trillion (infrastructure spending):
• $650 billion (existing programs)
• $550 billion (new programs)
35Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
0
50
100
150
200
250
300
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Basis
po
ints
BBB - AAA S&P
BBB - AAA S&P average
Pre-crisis average
BBB credit spreads have widened slightly but are still well below average
Data source: Bloomberg, Refinitiv MMD, 30 Apr 1998 – 30 Apr 2022. AAA and BBB rated municipal yields represented by Refinitiv Municipal Market Data (MMD) yields for AAA rated and BBB rated 20-year bonds, respectively. Data to the earliest period available. Pre-crisis period is 30 Apr 1998 - 31 Dec 2007. Past performance is no guarantee of future. Ratings shown are from S&P and are subject to change. AAA,AA,A, and BBB are investment grade ratings; BB,B, CCC/CC/C and D are below-investment grade ratings. Different benchmarks, economic periods, methodologies and market conditions will produce different results.
20-year BBB municipal yields versus AAA municipal yields
BBB – AAA spread average: 99 bps
Pre-crisis spread average: 62 bps
88 bps
36Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
High yield municipal bonds have a low correlation to other asset classes
Data source: Morningstar Direct; 01 Jul 1999 – 30 Apr 2022. Past performance is no guarantee of future results. Representative Indexes: Long Treasury: Bloomberg U.S. Treasury Long Index; Global Treasury: Bloomberg Global Ex U.S. Treasury Bond Index; Mortgage-Backed Securities: Bloomberg MBS (fixed rate) Index; U.S. Equity: S&P 500 Index; Broad Bond Market: Bloomberg U.S. Aggregate Bond Index; Emerging Markets Bond: Bloomberg Emerging Market Index; Corporate Investment Grade: Bloomberg U.S. Corporate Investment Grade Index; Corporate High Yield: Bloomberg U.S. Corporate High Yield Index; Asset-Backed Securities: Bloomberg Asset-Backed Securities Index; Municipal Bonds: Bloomberg U.S. Municipal Bond Index.
0.16
0.210.23 0.24
0.34
0.47 0.48 0.49
0.59
0.68
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Long Treasury Global Treasury Mortgage-backedsecurities
U.S. equity Broad bondmarket
Emergingmarkets bond
Corporateinvestment grade
Corporate highyield
Asset-backedsecurities
Municipal bonds
Correlation to Bloomberg High Yield Municipal Bond Index01 Jul 1999 – 30 Apr 2022
High yield municipal bonds tend to be less cyclical than corporate bonds due to the essential nature of the projects being financed.
37Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Municipals are attractive relative to sovereign debt
Data source: Bloomberg L.P., 30 Apr 2022. Past performance is no guarantee of future results. Municipal bonds represented by the Municipal Market Data (MMD) scale. The taxable-equivalent yield is based on the highest individual marginal federal tax rate of 37%, plus the 3.8% Medicare tax on investment income (the Net Investment Income Tax). Individual tax rates may vary.
• Global central banks monetary and fiscal policies remain generally supportive, but tightening is underway.
• U.S. Treasuries are attractive relative to other developed nations’ sovereign debt.
• Municipals are reporting higher yields, particularly on a taxable-equivalent basis.
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
AustriaAaa/AA+
GermanyAaa/AAA
DenmarkAaa/AAA
SwitzerlandAaa/AAA
Japan A1/A UnitedKingdomAa1/AAA
UnitedStates
Aaa/AA+
MunicipalBonds
Aaa/AAA
MunicipalBonds TEYAaa/AAA
MunicipalBonds
Taxable(AAA MMD)
Yie
ld (
%)
Global bond yields and ratings
2-year
10-year
30-year
Linear (30-year)
38Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
Stress in the system can always be a concern
Top 10 typical warning signs of a potential impending municipal bankruptcy
1. Late budget(s) 6. High debt service to total expenditures
2. High turnover 7. Large unfunded pension liability
3. High unemployment 8. Inability to balance budget
4. Low per capita income 9. Small general fund reserves/balance
5. Low real estate market values per capita 10. Statements indicating lack of support for debt service
39Municipal market update
OPINION PIECE. PLEASE SEE IMPORTANT DISCLOSURES IN THE ENDNOTES.
This material is not intended to be a recommendation or investment advice, does not constitute a
solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary
capacity. The information provided does not take into account the specific objectives or circumstances of
any particular investor, or suggest any specific course of action. Investment decisions should be made
based on an investor’s objectives and circumstances and in consultation with his or her financial
professionals.
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 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 advisor 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.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen, LLC.
Nuveen provides investment advisory solutions through its investment specialists.
This information does not constitute investment research as defined under MiFID.
GP
P-2
1960
32C
R-M
0522
P 3
5692
Risks and important disclosures
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