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SPDR® Nuveen Municipal Bond ETF [MBND] – Q3 2021 Commentary

MBND launched during February with an initial seed of $30 million.
In the third quarter, the fund maintained shares outstanding, experiencing no additional share creation. 


Performance
For the quarter, MBND returned -0.47%, underperforming its benchmark by 37 basis points (bps). The fund tracked the benchmark until the third week of August before falling slightly behind into September. The municipal yield curve experienced a bear steeping during the second quarter as interest rates rose on all maturities, with yields moving higher by 1-3 bps under five years and 18-20 bps further out. The market remained relatively flat until the final week of September. The steepening of the yield curve and rising interest rates caused shorter-maturity bonds to outperform those in intermediate to longer maturity ranges. The fund’s longer duration posture relative to the benchmark hurt performance. Along with duration positioning, sector allocation and security selection also detracted from performance.

The fund’s taxable municipal bond exposure benefitted performance again in the third quarter. Taxable municipals outperformed tax-exempt municipals, however underperformed US Treasuries. Taxable municipals continue to garner strong demand across the globe as taxable issuance remains historically strong and valuations remain attractive compared to other similar quality fixed income asset classes.

Fund Performance

Quarter in Review
Municipals underperformed Treasury bonds in the third quarter for the first time since their recovery began in spring 2020. This backup in rates and ratios helps to normalize the relationship, and enables municipals to offer investors a better value. Credit continued to outperform, but at a slower pace. Credit spreads narrowed slightly due to surging municipal revenues.

While the 10-year Treasury yield was 46 bps higher at the beginning of the quarter, the yield trajectory has shifted upward. The yield increased off its lows by 42 bps during the second quarter as concerns surrounding the delta variant of corona virus stifled growth projections and expectations of the Fed easing their purchasing program. Municipal-to-Treasury yield ratios remain historically low, after reaching historical highs in 2020. The 10-year municipal-to-Treasury yield ratio moved from 66% to 75% during the third quarter, versus a long-term average of 85%. The 30-year ratio dipped into the 66% in the quarter, but ultimately ended the quarter at the high of 80% compared to a long-term average of 93%. This is still lower than the long-term historical average, and may indicate that investors are anticipating higher individual income tax rates in the near future.

New issue supply is up 19% year over year, as the second quarter 2020 saw light issuance in the early days of the COVID-19 pandemic. Issuance was down 16% in the third quarter year over year as many municipalities have capitalized on low interest rates.

Portfolio Positioning and Outlook
The fund’s long duration positioning relative to the benchmark, sector allocation, and security selection were all detractors to performance this quarter. As of the end of September, the fund’s modified duration is 1.02 years longer than the benchmark. This longer positioning hurt performance, particularly an overweight to bonds with durations 6 years and longer. Although we shortened the fund’s duration to be more in line with the benchmark during the quarter, we still see value in longer duration bonds through year end.

The fund benefitted from overweight allocations to Electric and an underweight exposure to Transportation and IDR/PCR sectors, although security selection within these allocations was additive. The fund has a roughly 3% position in taxable municipal bonds that also contributed to performance for the quarter. The strongest performing names this quarter include Washington State, Energy Northwest Columbia Electric, Los Angeles Airports and Indiana US Steel bonds. Names that detracted include Medford Asante Health, Illinois State and Cleveland Clinic Hospital bonds. Premium to NAV decreased to 0.002%.*

*This information should not be considered a recommendation to invest in a particular sector shown. It is not known whether the sectors shown will be profitable in the future.

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