SPDR® Nuveen Municipal Bond ETF [MBND] – Q4 2023 Commentary
For the quarter, MBND returned 6.57% on a NAV basis. Yields moved lower during the quarter and curve positioning was the largest driver of performance — rating and sector allocation were slightly positive contributors.
Performance
Over the quarter, the yield curve moved from 68 basis points (bps) in pick up to 90 bps in pick up in the 30 year and the two year, respectively. We saw the largest decrease in yields in the 6- to 15-year portion of the curve, with yields dropping between 115 bps and 119 bps, respectively. With the broader rally in yields, an overweight to bonds with less than 2 years to maturity hurt performance but was more than offset by an underweight in 2—8 years and an overweight in bonds maturing in more than 12 years. Investment-grade spreads tightened over the quarter, so being overweight in single-A and triple-B-rated bonds aided performance. Despite this, high yield spreads widened, and as such, an overweight to unrated bonds was a slight detractor to performance, but rating allocation remained a positive contributor to performance. Sector allocation also contributed to performance, as did an overweight in local general obligation bonds maturing in 12–17 years, and underweights in education, water, and sewer bonds.1
Fund Performance
| QTD (%) |
YTD (%) |
1 Year (%) |
3 Year (%) |
5 Year (%) |
10 Year (%) |
Since Inception Feb 03 2021 (%) |
|
|---|---|---|---|---|---|---|---|
| NAV | 6.57 | 5.85 | 5.85 | - | - | - | -0.96 |
| Market Value | 6.64 | 5.61 | 5.61 | - | - | - | -0.98 |
| Bloomberg 3-15 Year Blend (2-17) Municipal Bond Index | 6.79 | 5.44 | 5.44 | -0.14 | 2.25 | 2.73 | -0.34 |
Source: State Street Global Advisors, as of December 31, 2023. Past performance is not a reliable indicator of future performance. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. All results are historical and assume the reinvestment of dividends and capital gains. Visit www.ssga.com for the most recent month-end performance. The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements. Performance returns for periods of less than one year are not annualized. The market price used to calculate the market Value return is the midpoint between the highest bid and the lowest offer on the exchange on which the shares of the fund are listed for trading, as of the time that the fund’s NAV is calculated. If you trade your shares at another time, your returns may differ. It is not possible to invest directly in an index. Index performance does not reflect charges and expenses associated with the fund or brokerage commissions associated with buying and selling a fund. Index performance is not meant to represent that of any particular fund.
Gross Expense Ratio: 0.40% Net Expense Ratio: 0.40%
The gross expense ratio is the fund’s total annual operating expenses ratio. It is gross of any fee waivers or expense reimbursements. It can be found in the fund’s most recent prospectus.
Quarter in Review
The municipal bond market started the quarter with negative October performance; however, performance took off in November and December on a shift in investor sentiment surrounding Fed interest rate policy. This resulted in the strongest quarterly municipal performance since 1986.
Despite this, municipal funds experienced net negative flows, as aggressive tax loss harvesting and flow out of the ultra-short and short funds offset positive flows into ETFs and longer-positioned open-ended funds. Issuance remained near third-quarter levels, higher than the fourth quarter of 2022. We anticipate issuance to remain near these levels, higher than in 2022. We anticipate issuance to remain near these levels, higher than in 2022 but still meaningfully lower than totals seen in previous years.
Fundamentals remain strong, with upgrades still outpacing downgrades, and municipals are flush with cash from the federal stimulus and historical revenue collection in the expanding economy. While slowing economic conditions due to tighter fiscal policy have started to flow through to budgets, municipalities are well positioned to weather a more significant economic slowdown without widespread defaults or impairments.
Despite negative flows from municipal open-end funds, individual bond inflows and broader rallies pushed municipal ratios meaningfully tighter. The 10-year municipal-to-treasury yielded the quarter at 59%, meaningfully richer than the 74.5% it finished the third quarter at, and the historical average was nearer to 75-80%. The 30-year ratio was more stable, though it still moved richer, finishing at 85% after starting at 90%, which is in line with historical averages.2
Portfolio Positioning and Outlook
During the quarter, as the curve steepened and yields came down, we increased exposure to the intermediate and extended part of the curve and looked to increase yield and potential total return by adding out-of-index names to generate alpha. This was done by adding longer dates and names with below investment grade ratings that we have constructive views on. While we believe there is likely to be continued volatility surrounding the Fed outlook, we expect duration and additional yield to benefit the Fund’s return profile moving forward. Despite moving towards more traditional intermediate and longer exposure, we are still utilizing a barbell approach to take advantage of income available at the short end of the yield curve and intermediate and longer without moving overall duration meaningfully.
We see a few main factors driving first-quarter municipal bond performance. Yields remain attractive despite the strong rally in November and December, which should provide strong investor interest in the municipal market. Additionally, funds are showing similar yields now available in individual bond portfolios, providing a wider investor base eagerly looking for duration and to be paid for taking on this interest rate risk.
While revenue collections are below peaks witnessed in 2022, they remain above pre-pandemic levels. They are combined with robust rainy day funds, which should keep municipal defaults low, rare, and idiosyncratic even in the higher interest rate environment. Supply should remain near levels seen in 2023, with the higher coupon, calls, and maturity proceeds to be reinvested within the market rather than new issuance. A strong fundamental and improving technical environment should be additive to municipal performance.
Finally, inflation should continue with a favorable projection into 2024, which should be met with rate cuts, which will benefit intermediate- and longer-duration products. Municipals provide strong fundamentals, still extremely attractive taxable equivalent yields, and a positive sloped yield curve, which is attractive in the current macro environment and aligns well with this portfolio’s positioning.