Buy This Area of Fixed Income for a Volatility and Tax Shield: Nuveen


With rate cuts likely coming, a rotation out of Big Tech unfolding, the labor market weakening, and a looming election, the next few months look choppy for equities.

That’s why investors are running to this overlooked area of fixed income: municipal bonds.

Unlike traditional bonds, munis are issued by states and local governments to finance public works and infrastructure projects. Munis also have the added perk of tax-free interest income.

Dan Close, head of municipals at the $1.2 trillion global investment manager Nuveen, is seeing increased appetite for these government-backed debt instruments. While 2022 and 2023 saw large net outflows from the muni market, 2024 has seen $12 billion of inflows year-to-date.

In an interview with Business Insider, Close shared two reasons to add munis to a portfolio, and the best ways to invest.

Pay fewer taxes

One of the most attractive reasons to invest in munis is their tax benefits. All munis are exempt from federal income tax, and state and local munis are also exempt from their respective taxes.

“A lot of investors in high-tax states like California and New York tend to buy local obligations because they are exempt at the state level,” Close said. “In New York City, you get a triple exemption,” meaning a New York City muni bond would be exempt from federal, state, and local taxes.

Munis are especially advantageous for those in the highest tax bracket, who can avoid giving up the 37% of interest income they would otherwise have to pay in federal taxes.

“If you are currently, let’s say, getting 5% in the municipal market that comes out to like 7.9%, almost 8%, on a tax equivalent basis,” added Close.

Additionally, the Tax Cuts and Jobs Act (TCJA) is set to expire by the end of 2025, making it likely that more American taxpayers will foot a higher tax bill. This makes munis even more attractive.

Regardless of a Trump or Harris win, Close believes it’s unlikely that the TCJA will be rolled forward, so don’t bet on a Republican victory to keep your taxes low. He thinks there’s a high likelihood of a divided government in November, which will make it more difficult to keep the tax cuts passed under Trump.

“It’s just much more difficult when you have a split Congress and the White House with a different party to get comprehensive tax reform,” Close said.

If this is the case, investors can prepare for higher taxes by adding munis as a tax shield to their portfolios.

Protect against volatility

In addition to providing tax benefits, munis tend to perform well under unstable macroeconomic conditions such as market volatility or election uncertainty.

There’s been a lot of buzz about when and by how much the Fed will cut interest rates, but munis likely won’t be hit by the central bank’s decisions as hard as other bonds, Close said.

“The muni market is a little more muted in its volatility as far as moves and rates both on the way up and the way down, so we don’t move as quickly when Treasurys are rallying and we don’t move as quickly when Treasurys are backing up,” Close said.

Since munis are backed by government entities, they’re generally higher quality than corporate bonds. According to Close, that means they have lower default rates in a more severe economic downturn.

Investors who are worried about election-induced volatility can also feel confident in their muni investments, he said.

“Generally speaking, the municipal market has very, very good support from both Democrats and Republicans,” Close said.

That’s because regardless of party affiliation, state and local governments still need to build schools or renovate roads and bridges. And with the increasing need to upgrade the nation’s infrastructure, Close also sees an opportunity for the muni market to boom.

How to invest

The most direct way to invest is by purchasing the bond straight from the issuing municipality. Munis can be purchased through a brokerage firm such as Fidelity or Charles Schwab.

Additionally, investors can invest in muni bond mutual funds or ETFs such as the SPDR Nuveen Municipal Bond ETF (MBND), the VanEck High Yield Muni ETF (SHYD), and the iShares National Muni Bond ETF (MUB).

Close noted that there are fewer muni ETFs available than corporate ETFs. However, ETFs can be a more accessible way into munis, as investors can choose to invest smaller amounts of capital. According to the Municipal Securities Rulemaking Board, the governing body overseeing the muni market, the investment minimum for an individual bond is usually $5,000.





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