Curve positioning was the largest positive contributor to performance for the quarter, and rating allocation and selection aided performance. Sector allocation was a slight detractor from performance.
Although the yield curve steepened slightly during June, the yield curve flattened overall during Q2. At the end of June the yield curve was inverted between 1 and 9 years, but had an upward slope starting at 9 years. As such, an overweight to bonds maturing in less than 2 years and in 12 to 22 years aided performance, as did an underweight to bonds maturing in 2 to 12 years. An overweight to bonds rated single-A, double-B and unrated bonds, as well as an underweight to bonds rated triple-A aided performance. An underweight in industrial development bonds hurt performance but was mostly offset by an underweight to housing bonds. Security selection also aided performance during the quarter.
|1 Month (%)||QTD (%)||YTD (%)||1 Year (%)||3 Year (%)||5 Year (%)||10 Year (%)||Since Inception
Apr 04 2022 (%)
|Bloomberg 3-15 Year Blend (2-17) Municipal Bond Index||0.78||-0.46||1.93||2.97||-0.37||1.91||2.48||0.90|
Source: State Street Global Advisors, as of June 30, 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 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 calculates. If you trade your shares at another time, your returns may differ. Index returns do not represent actual fund performance and are for illustration purposes only. Index performance does not reflect charges and expenses associated with the fund or brokerage commissions associated with buying and selling exchange traded funds. It is not possible to invest directly in an index. 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.
Gross Expense Ratio: 0.70% Net Expense Ratio: 0.70%
Municipal bond market performance was volatile in the second quarter, with uncertainty surrounding inflation and the Federal Reserve’s (Fed) actions in response to data releases continued to dominate market direction. Additionally, flows into municipal funds remained negative until June. However, strong investor interest in individual bond portfolios, as well as continued low issuance kept municipals well positioned. Fundamentals remained solid, although municipal revenues have slowed as tighter economic conditions pass through.
The 10-year municipal-to-Treasury yield ratio varied during the quarter, as Treasury volatility did not pass directly through to municipals. The ratio ended the quarter at 67%, just cheaper than the 65% quarter-end rate. This is still relatively rich compared to the long-term historical average of ~80%. Conversely, the 30-year ratio was more stable and ended the quarter in line with historical averages at 90%, the same level where it started the year.1
Supply continued its slow pace to start the year, although issuance picked up in June as municipal fiscal years come to an end and interest rates are expected to remain elevated for longer. Municipal reinvestment dollars, proceeds from coupon payments, bond maturities and refundings, continue to outpace supply, and allowed the market to easily absorb higher June issuance as well as the FDIC’s liquidation of municipal holdings from banks bankruptcy proceedings.2
During the quarter we reduced our exposure to short-intermediate positioned bonds and added exposure in longer positioned bonds. This has increased duration slightly within the portfolio, and we are now longer than the benchmark. While we do believe there is likely to be some continued volatility surrounding the Fed outlook, we expect duration to be beneficial to income moving forward. By utilizing a barbelled approach we can take advantage of income available at the short end of the yield curve, as well as intermediate and longer without moving overall duration meaningfully.
We see two main factors driving third quarter performance. First, the technical environment is likely to continue to be supportive. Muted issuance and strong demand are current tailwinds for the asset class, and inflows for both long duration and high yield have been positive year-to-date, and we have begun to see broader inflows into the municipal market.
Second, credit fundamentals remain strong. Municipalities have record levels of tax collections and cash on hand. Credit conditions are solid, even in the face of interest rate volatility. Credit upgrades have continued to outpace downgrades.3 And municipalities tend to do well in most economic environments as essential service monopolistic providers.
We believe our bottom-up, fundamental credit research process is well-positioned to take advantage of the opportunities we are seeing in the market today.
1Reuters MMD and US Department of Treasury, June 2023.
2BofA, June 2023.
3Census.gov, 30 Jun 2023; National Association of State Budget Officers (NASBO), The Fiscal Survey of States, Spring 2022. Pew Charitable Trust, States Build Their Reserves Amid Growing Uncertainties, 30 Jun 2023.
Basis Point (bps)
A unit of measure for interest rates, investment performance, pricing of investment services and other percentages in finance. One basis point is equal to one-hundredth of 1 percent, or 0.01%.
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 June 30, 2023, 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.
The returns on a portfolio of securities which exclude companies that do not meet the portfolio's specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio's ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.
To determine if an issuer is an ESG Leader, the Fund utilizes a scoring system developed by the Sub-Adviser, the ESG Municipal Bond Scoring Tool. Any imperfections, errors or limitations in the Scoring Tool, or the models or data underlying the Scoring Tool, could result in incorrect outputs or in Fund investments different from or opposite to those expected or desired by the Sub-Adviser. In addition, there is a risk that an issuer identified as an ESG Leader by the Scoring Tool does not operate as anticipated. In the event an ESG Leader’s score falls below 3, the Sub-Adviser intends to divest the Fund’s investments in a bond of such issuer in a prudent manner, unless the bond is determined to be a thematic bond and would not result in the Fund exceeding its aggregate investment limit in thematic bonds. The Fund’s divestment of such bonds may not be immediate, which could cause the Fund to be invested in municipal bonds that do not align with its ESG considerations.
Past performance is not a reliable indicator of future performance.
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The municipal market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a debt security to decrease. A portion of the dividends you receive may be subject to federal, state, or local income tax or may be subject to the federal alternative minimum tax.
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The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
The value of the debt securities may increase or decrease as a result of the following: market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or illiquidity in the debt securities markets; the risk of low rates of return due to reinvestment of securities during periods of falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. This may result in a reduction in income from debt securities income.
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