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SPDR® Nuveen Municipal Bond ETF [MBND] – Q2 2021 Commentary

For the quarter, MBND returned 1.68%, outperforming its benchmark by 69 basis points (bps).


Performance
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.

Fund Performance

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%.

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