SPDR® Nuveen Municipal Bond ETF [MBND] – Q1 2022 Commentary
MBND launched during February 2021 with an initial seed of $30 million. In the first quarter of 2022, the fund maintained shares outstanding, experiencing no additional share creation.
For the quarter, MBND returned -6.51%.The Yield Curve flattened during the first quarter with the change in yields ranging from 1.52% on bonds due in two years, to 1.04% on bonds due in 25 to 30 years according to the Refinitiv Municipal Market Data (MMD) scale of yields of general obligations bonds rated triple-A. The Yield Curve flattened during the first quarter with the change in yields ranging from 1.52% on bonds due in two years, to 1.04% on bonds due in 25 to 30 years according to the Refinitiv MMD scale of yields of general obligations bonds rated triple-A. The funds longer duration posture relative to the benchmark hurt performance. Duration positioning was the largest driver of underperformance, as sector allocation was a slight detractor and rating allocation and security selection being slight positive contributors.
The fund’s taxable municipal bond exposure hurt performance in the first quarter. Taxable municipals underperformed tax-exempt municipals and US Treasuries. Taxable municipals only make up a small percentage of the funds holding so the overall impact was not as impactful as duration positioning.
Quarter in Review
The first quarter was the most challenging quarter for municipal bonds since 1980, as returns were negatively impacted by US Treasury market volatility, persistent inflation concerns and geopolitical tensions1. Notably, credit fundamentals remain very strong, with positive economic growth boosting tax revenues to all-time records. Once the US Federal Reserve (Fed) proves successful in reigning in inflationary pressures, interest rate volatility should begin stabilizing. We believe today’s more attractive bond valuations and much higher yields bode well for longer-term performance.
AAA municipal benchmark interest rates more than doubled, from 1.03% to 2.18%, as the 10-year Treasury sold off while municipal-to-Treasury ratios cheapened meaningfully. Municipal-to-Treasury yield ratios have risen sharply, which indicates municipals underperformed Treasuries for the quarter. Municipals ended 2021 relatively rich by historical standards, given the economic and credit quality recovery, moderate bond supply, 18 months of robust inflows and the prospect of higher taxes. In the 10-year portion of the yield curve, municipals were valued at 67% of Treasuries to begin the quarter, increasing to 94% by quarter-end. The 30-year ratio, which is typically cheaper, moved similarly from 78% to 104%, compared to the long-term average of 93%.2
Supply declined by 14% from the same period last year to $94.8 billion, primarily because refundings dropped by 42%.3 The market selloff appears to have stalled the incentive of many issuers to refund existing issues, at least temporarily.
Portfolio Positioning and Outlook
The fund’s long duration positioning relative to the benchmark drove underperformance during the quarter. Going into the quarter, the fund’s effective duration was just under a year longer than the benchmark. This longer positioning hurt performance, particularly an underweight to durations of less than 4 years and an overweight to bonds with durations 10 years and longer. Although we shortened the fund’s duration, which helped given the rising rate environment, the fund was still positioned longer than the benchmark. The back up in rates has provided attractive relative value to the intermediate and longer end of the curve going forward.The fund benefitted from an underweight in industry development revenue (IDR)/pollution control revenue (PCR) sector bonds, which was offset by an overweight to Special Tax bonds. The fund has a roughly 3% position in taxable municipal bonds that were slight detractors to performance for the quarter. The strongest contributors to performance this quarter include Florida Brightline Rail, Kentucky Next Gen Highway and Pennsylvania University of Pittsburgh Medical Center Hospital bonds.* Names that detracted include New York City General Obligation, New Jersey School Facility Construction and Illinois State General Obligation bonds. Premium to NAV moved to 0.015%.
*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
1 Nuveen Municipal Commentary Update as of 4/18/22. 2 Treasury Data is from The U.S. Department of the Treasury (sourced from treasury.gov). These data points were from 12/31/21 and 3/31/22. Historical averages are also based off the same source. 3 New Issue data comes from Bond Buyer and looked at 04/01/2021 to 3/31/22 in comparison to 04/01/2020 to 3/31/21.
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Investing involves risk including the risk of loss of principal.
The views expressed in this material are the views of Nuveen Asset Management, LLC through the period ended March 31, 2022 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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