Nuveen’s Municipal Bond Market Update As Of April 30, 2022

I thought it might help if I shared this slide presentation from Nuveen so that shareholders and potential investors alike could learn a little bit more about the municipal bond market and hopefully provide some perspective during this difficult rate rise period.

What is the primary concern with municipal bond funds right now? Well, that depends on whether you own individual municipal bonds, municipal bond mutual funds/ETFs or if you own municipal bond CEFs.

If you own actual municipal bonds, you’re probably rejoicing right now with the much higher yields you can get across all ratings from AAA to high yield munis. But if you own municipal bond funds, it’s a bit more complicated.

From a municipal bond ETF fund and mutual fund standpoint, the problem seems to be mostly shareholder redemptions and reduced liquidity which has resulted in a feedback loop in which selling by nervous shareholders begets more selling as prices go down. This has put continued downward pressure on municipal bond prices and thus, on municipal bond CEF NAVs too.

But from a municipal bond CEF perspective, liquidity doesn’t seem to be much of an issue as there is an active trading market for municipal bond CEFs and the high tax-free yields they offer. Indeed, the biggest risk for muni bond CEFs is really the spread between shorter-term interest rates and longer-term rates since these funds are highly leveraged and use shorter-term swap rates to buy longer-term securities.

The good news is that with the dramatic drop in municipal bond prices this year, investors and portfolio managers alike can exchange maturing or called securities with much higher yields than what the markets offered just last year or before. Thus, there is largely an offset with the rise in shorter term rates as long as short-term rates don’t rise faster than longer-term rates resulting in an inverted yield curve.

In any event, I hope the slide presentation is of value to you and thanks to Nuveen for forwarding it to me:

Thank you for reading my article. My goal is to give you observations and actionable ideas in Closed-End funds while educating you on how these unique and opportunistic funds work.

CEFs can be one of the most exhilarating and yet most frustrating security classes to invest in, and it’s important that you have someone who can be a level head during up and down periods of the market. I hope to be that voice of calm when necessary.  ~ Douglas Albo