Ever since Federal Reserve chairman Jerome Powell told the markets to expect the Fed to cut interest rates several times in 2024, the bond market has been on a tear.
Falling interest rates should ease issuers’ financial burden, so investors should, in theory, be willing to push a little further out on the credit risk spectrum. And for now, that’s what appears to be happening. The downward move in the yield curve has been a rising tide that’s lifted all boats, from Treasuries to junk bonds.
The positive sentiment has extended, as well, to municipal bonds, which are trading near 52-week highs. Some players in the municipal bond market have begun pointing to another long-term factor that favors these muni bonds: the spiraling federal debt.
Multi-trillion dollar budget deficits could become the norm, according to CBO (Congressional Budget Office) projections. That could mean Uncle Sam is going to face a tough choice: cut spending or raise taxes—and sooner rather than later.
If federal income tax rates are raised in the future, it will make munis even more attractive since they’re federally tax exempt.
So, let’s look at one closed-end muni bond fund that could be a great addition to your portfolio.
Nuveen Municipal Credit Income Fund
I’m talking about the Nuveen Municipal Credit Income Fund (NZF). Its portfolio consists of munis across all credit ratings.
Nuveen’s website gives us a brief description of the fund:
The Fund seeks to provide current income exempt from regular federal income tax by investing in an actively managed portfolio of tax-exempt municipal securities. Up to 55% of its managed assets may be in securities rated BBB and below at the time of purchase or, if unrated, judged to be of comparable quality by the Fund’s portfolio team, and the Fund uses leverage.
So NZF is a fund that has both investment grade and non-investment grade bonds in its portfolio, although the majority of the bonds it owns are investment grade (28.2% A-rated, 21.7% BBB-rated, 11.3% AA-rated). And the fund uses leverage in order to enhance its yield and total return potential.
One note: last spring, two other Nuveen closed-end funds—the Nuveen Ohio Quality Municipal Income Fund (NUO) and Nuveen Georgia Quality Municipal Income Fund (NKG)—were rolled into this fund. This brought the total assets under management to more than $3 billion.
Here are the top sector allocations for the fund, as of November 30, 2023:
- Transportation: 23.1%
- Healthcare: 22.6%
- Tax Obligation/Limited: 21.2%
- Tax Obligation/General: 12.0%
- Utilities: 7.6%
The top three individual bond positions in its portfolio are:
- Energy Harbor Corporation: 3.1%
- Puerto Rico Sales Tax Financing Corp Sales Tax Revenue: 2.7%
- Texas Private Activity Bond Surface Transportation Corporation: 2.3%
The top states represented in the portfolio are:
- Illinois: 13.6%
- California: 13.2%
- New York: 10.1%
My Thoughts on NZF
I actually like the sector allocation for this fund a lot.
The fund’s one-third exposure to bonds funded by tax receipts offers a measure of safety and reliability. Healthcare should continue to be a growth area of the U.S. economy, thanks to the aging of America. Transportation and utilities are both infrastructure-related, an area that is receiving a real boost thanks to legislation like the Bipartisan Infrastructure Law and the Inflation Reduction Act.
The fund’s one minus is the relatively long duration of its bond portfolio, which averages out at around 16 years, translating to a lot of interest rate volatility. That volatility was in the fund’s favor over the past several months, but hurt it over the past two years.
The Nuveen Municipal Credit Income Fund was launched on September 25, 2001. Since its inception, the fund has returned a total of 195%, which translates to nearly 5% annually.
The fund’s net asset value (NAV) has remained relatively steady around the breakeven mark over the life of the fund. Obviously, that’s a great sign for investors looking for distribution stability. And of course, the fund’s payouts have almost entirely consisted of federally tax-exempt income.
NZF maintains a fixed monthly distribution policy that currently pays $0.0515 per share, or $0.618 per share annually. Nuveen raised its dividend by $0.0085, or 20%, on October 23, 2023. At current share prices, this translates to an annualized forward-looking yield of 5.2%.
The 5.2% yield is higher than you’ll find in even high-yield muni bond ETFs. So, coming from a mostly investment grade muni portfolio, this is highly attractive.
NZF’s discount to NAV (14.78%) is currently at some of the lowest levels of the fund’s history. Its all-time high discount was 16.29%. So if interest rates do continue to move down, NZF shares are a true bargain. It’s a buy around $11.80 a share.
