For the quarter, MBND returned 1.68%, outperforming its benchmark by 69 basis points (bps).
For the quarter, MBND returned 1.68%, outperforming its benchmark by 69 bps. The fund tracked the benchmark for the first week of April and then pulled ahead before moving in tandem with the index for the balance of the quarter. The municipal yield curve experienced a bull flattener during the second quarter as interest rates fell on all maturities except for years 1 and 2. The flattening of the yield curve and declining interest rates caused longer-maturity bonds to outperform those in shorter maturity ranges. MBND benefitted from its longer duration posture relative to the benchmark. Sector allocation and security selection also contributed to performance.
The fund’s taxable municipal bond exposure benefitted performance. Taxable municipals outperformed tax-exempt municipals and U.S. Treasury bonds for the quarter. Taxable municipals continue to garner strong demand across the globe as municipal credit continues to improve and valuations remain attractive compared to other similar quality fixed income asset classes.
Quarter in Review
We think it is fair to say that the municipal market has fully recovered from the pandemic. The municipal market continued to outperform other fixed income asset classes in this favorable environment of falling rates, accommodative Fed policy and supportive technicals. Despite a tweak to its perspective in June, the Fed is still dovish, believing that inflationary pressures will prove temporary. It will allow the recovery to continue so that unemployment can decline further. Quantitative easing should be ongoing throughout the year, providing liquidity to fixed income markets.
While the 10-year Treasury yield was 52 bps higher for the first half of the year, the yield trajectory has shifted downward. The yield declined off its highs by 29 bps during the second quarter in an environment of rising growth and inflation. Municipal-to-Treasury yield ratios remain historically very low, after reaching historical highs in 2020. The 10-year municipal-to-Treasury yield ratio moved from 64% to 68% during the second quarter, versus a long-term average of 85%. The 30-year ratio dipped into the 60% range during the quarter, but ultimately ended the quarter steady at 73% compared to a long-term average of 93%. These low ratios indicate municipal outperformance, driven by both technical and fundamental factors. Low municipal-to-Treasury yield ratios reflect investors’ preference for municipal bonds so far this year.
New issue supply is up 8.5% year-to-date over last year, when the second quarter 2020 saw light issuance in the early days of the COVID-19 pandemic, followed by an increase as demand for bonds returned to the market over the summer.
Portfolio Positioning and Outlook
The portfolio began the quarter with seed capital already fully deployed and has experienced additional capital contributions. The fund’s long duration positioning relative to the benchmark, sector allocation, and security selection were all additive to performance this quarter. As of the end of June, the fund’s modified duration is 1.07 years longer than the benchmark. This longer positioning has helped performance, particularly an overweight to bonds with durations 6 years and longer. Looking forward, we are looking to shorten the fund’s duration to be more in line with the benchmark in light of market expectations of inflation.
The fund benefitted from overweight allocations to leasing and special tax bonds. The fund had underweight exposures to Housing and industry development review (IDR)/ pollution control revenue (PCR) sectors, although security selection within these allocations was additive. The fund has a roughly 6% position in taxable municipal bonds that also contributed to performance for the quarter. The strongest performing names this quarter include New York Transportation Development Corporation, New Jersey Economic Development Authority School Facilities Construction Bonds, and Massachusetts Bay Transportation Authority. Another name worth mentioning is the Chicago Board of Education which was the strongest performer in June. The Illinois complex of credits has been performing well due to stimulus money that has flowed into the state in a time where investors are looking for names that offer yield and spread. Names that detracted include Los Angeles Unified School District, Los Angeles Department of Water and Power, and Southeast Energy Authority. Premium to NAV decreased to 0.069%.
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%.
An environment where long-term rates on bonds fall more rapidly than short-term rates resulting in a flatter yield curve.
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, 2021 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.
State Street Global Advisors Funds Distributors, LLC is the distributor for certain registered products on behalf of the advisor. SSGA Funds Management has retained Nuveen Asset Management. State Street Global Advisors Funds Distributors, LLC is not affiliated with Nuveen Asset Management.
This communication is not intended to be an investment recommendation or investment advice and should not be relied upon as such.
Past performance is not a reliable indicator of future performance.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
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.
The fund is actively managed. The sub-adviser’s judgments about the attractiveness, relative value, or potential appreciation of a particular sector, security, commodity or investment strategy may prove to be incorrect, and may cause the fund to incur losses. There can be no assurance that the sub-adviser’s investment techniques and decisions will produce the desired results