The what, why and how of the municipal market

Transcription

1 4Q CHART TALK 4Q 2017 Opportunities in municipal bonds The what, why and how of the municipal market NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE

2 Leading the way in municipal bonds Since 1898, Nuveen has been a pioneer in municipal bonds, helping to build lasting value for investors. This municipal bond heritage is reflected in the way Nuveen Asset Management manages portfolios today Years of experience 25 Credit research analysts $ 134.0b Municipal presence AUM 2 EXPERIENCE A rich heritage spanning 120 years remains focused on relative value, principal growth and tax-aware investing RESEARCH As one of the industry s largest credit research teams, 25 analysts averaging 18 years experience are dedicated to municipal investing PRESENCE Market power and institutional pricing help to provide an advantage when evaluating and purchasing bonds CHART TALK: Opportunities in municipal bonds 2 1 Nuveen, LLC. traces its history back to Nuveen s asset management business was established in Nuveen Asset Management municipal fixed income assets under management as of 31 Dec 2017

3 Opportunities in municipal bonds Key 2018 themes Broad market themes U.S. real GDP reaches 3% and nominal GDP 5% for the first time in more than a decade. Unemployment falls to the lowest level in nearly 50 years, threatening to break below 4%; the rise in overall inflation remains muted. The Federal Reserve raises rates 2 or 3 times as the Powell Fed continues a slow and steady march towards normalization. The U.S. Treasury yield curve remains flat but does not invert, as longer rates slowly drift higher. The 10-year yield trends toward 3%. Municipal market themes Expect meaningfully lower municipal supply due to tax reform, with strong demand. With high quality bonds scarce and demand strong, high yield spreads tighten to less than 200 versus AAA municipals. The downward trajectory of defaults continues (excluding Puerto Rico), the slowest pace since Municipals outperform Treasuries, as bonds perform their traditional role of diversifying volatility from other asset classes. CHART TALK: Opportunities in municipal bonds 3 Certain statements may be deemed forward-looking statements. Please note that any such statements are not guarantees or intended to constitute a prediction of any future performance; actual results or developments may differ materially from those projected.

4 The market is dominated by high quality and essential service sectors Municipal market overview Municipal market credit quality breakdown (%) Municipal market sector breakdown % Tax-supported AAA/Aaa AA/Aa A/A BBB/Baa BB/Ba B/B Unrated Other 40.2% 7.2% 8.2% 1.8% 11.1% 11.9% 15.9% 2.4% 3.8% 8.7% 1.1% Essential services Education Health care Housing Transportation Utility Others sectors Industrial Other revenue Pre-refunded Tobacco Data source: Standard & Poor s for the S&P Municipal Bond Index as of 31 Dec Ratings shown are the highest rating given by one of the following national rating agencies: Standard & Poor s (S&P), Moody s Investors Service, Inc. (Moody s) or Fitch, Inc. (Fitch). Credit ratings are subject to change. Aaa, Aa, A and Baa are investment grade ratings; Ba, B and Caa/Ca/C are below investment grade ratings. Certain bonds backed by U.S. government or agency securities are regarded as having an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by these national rating agencies. High yield or lower-rated bonds and municipal bonds carry greater credit risk, and are subject to greater price volatility. Totals may not add up to 100% due to rounding. Municipal bonds generally feature high credit qualities and are backed by tax revenues or linked to essential services CHART TALK: Opportunities in municipal bonds 4

5 In a rising tax environment, it s not what you earn, it s what you keep Municipal market overview Taxable and tax-equivalent yields (%) Taxable yield Taxable-equivalent yield (37.0% tax bracket, plus 3.8% Medicare tax) Tax-exempt yield* Tax-exempt yield Taxable-equivalent yield = (100% Marginal tax rate) The tax advantages of municipal bonds can enable investors to keep more of what they earn Corporate Municipal bonds Corporate Municipal bonds Corporate Municipal bonds Short term Intermediate term High yield The taxable-equivalent yield is based on the highest individual marginal federal tax rate of 37.0%, plus the 3.8% Medicare tax on investment income (the Net Investment Income Tax). Individual tax rates may vary. *Some income may be subject to state and local taxes and the federal alternative minimum tax. Data source: Bloomberg, L.P., 31 Dec Past performance is no guarantee of future results. Yields are yield-to-worst. Yield-to-worst is the lowest potential yield that can be received on a bond without the issuer defaulting. Taxable-equivalent yield is the yield a taxable investment needs to possess (before taxes) for its yield to be equal to that of a tax-free municipal investment. The yields shown are based on the highest individual marginal federal tax rate of 37.0%, plus the 3.8% Medicare tax on investment income. Individual tax rates may vary. They do not take into account the effects of the federal alternative minimum tax (AMT) or capital gains taxes. Representative Indexes: Short Term Corporate Bonds: Bloomberg Barclays U.S. Government/Credit 1-3 Year Index; Short Term Municipal Bonds: Bloomberg Barclays Municipal Short Index; Intermediate Term Corporate Bonds: Bloomberg Barclays U.S. Government/Credit Intermediate Index; Intermediate Term Municipal Bonds: Bloomberg Barclays Municipal Intermediate Index; High Yield Corporate Bonds: Bloomberg Barclays Corporate High Yield 2% Issuer Capped Index; High Yield Municipal Bonds: Bloomberg Barclays High Yield Municipal Bond Index. Different benchmarks, economic periods, methodologies and market conditions will produce different results. It is not possible to invest directly in an index. CHART TALK: Opportunities in municipal bonds 5

6 Municipals have exhibited lower volatility Municipal market overview Asset class volatility (standard deviation) 3 years 5 years 10 years Municipals have produced relatively low volatility compared to other asset classes U.S. Treasury year U.S. Treasury 20+ year Global bonds High yield corporates International equity Emerging markets U.S. equity High yield municipals Investment grade municipals Data source: Morningstar, 1 Jan Dec Past performance is no guarantee of future results. Representative Indexes: Treasuries: Bloomberg Barclays U.S Year Treasury Index and the Bloomberg Barclays U.S. 20+ Year Treasury Index; Global Bonds: Bloomberg Barclays Global Aggregate Unhedged Index; High Yield Corporates: Bloomberg Barclays High Yield Corporate Index; International Equity: MSCI EAFE Index; Emerging Markets: MSCI Emerging Markets Index; U.S. Equity: S&P 500 Index; High Yield Municipals: S&P Municipal High Yield Index and Investment Grade Municipals: Bloomberg Barclays Municipal Bond Index. Indices are unmanaged and unavailable for direct investment. CHART TALK: Opportunities in municipal bonds 6

7 ...While producing relatively attractive returns Municipal market overview Risk-adjusted returns (Sharpe ratio) 3 years 5 years 10 years Municipals have produced relatively high risk-adjusted returns compared to other asset classes U.S. Treasury year U.S. Treasury 20+ year Global bonds High yield corporates International equity Emerging markets U.S. equity High yield municipals Investment grade municipals Data source: Morningstar, 1 Jan Dec Past performance is no guarantee of future results. Representative Indexes: Treasuries: Bloomberg Barclays U.S Year Treasury Index and the Bloomberg Barclays U.S. 20+ Year Treasury Index; Global Bonds: Bloomberg Barclays Global Aggregate Unhedged Index; High Yield Corporates: Bloomberg Barclays High Yield Corporate Index; International Equity: MSCI EAFE Index; Emerging Markets: MSCI Emerging Markets Index; U.S. Equity: S&P 500 Index; High Yield Municipals: S&P Municipal High Yield Index and Investment Grade Municipals: Bloomberg Barclays Municipal Bond Index. Indices are unmanaged and unavailable for direct investment. CHART TALK: Opportunities in municipal bonds 7

8 Municipal bonds may improve portfolio returns while reducing risk Municipal market overview Risk/return characteristics of diversified portfolios Annualized after-tax return (%) 8% 7% 6% 5% 80%/20% 60%/40% 100% Municipals 40% 60% 60%/40% 20%/80% 100% Treasuries 100% Corporates 100% Equities A 40% municipal/60% stock mix assumed less risk with comparable after-tax return than an all-equity portfolio over 20 years Municipal/equity blend Corporate/equity blend Treasury/equity blend 4% Annualized standard deviation Data source: Bloomberg L.P., and Nuveen Asset Management, 1 Jan Dec Past performance is no guarantee of future results. Municipal Bonds: Bloomberg Barclays Long Municipal Index Treasury Bonds: Bloomberg Barclays Long Treasury Index Corporate Bonds: Bloomberg Barclays Long Credit Index Equities: S&P 500 Index. These conclusions are derived from the following portfolio assumptions: All investment income generated by the portfolio is reinvested annually, along with the after-tax proceeds of an arbitrarily assumed 20% annualized turnover rate. The allocation between the two assets was allowed to roam within a 1% band around its target before rebalancing. No provision was made for investment fees or commissions. Investment income was taxed at the historically appropriate rate for an individual with $100,000 in taxable income in year 2015 dollars; net capital gains taxes, if any, were deducted at the rate appropriate for the period. At the end of 2015, the portfolios were fully liquidated to recognize the existing tax liability. Different economic periods and different assumptions, such as tax rate, will have different results. This study is based on historical data gathered from sources we consider to be reliable and consistent. The methodology applied and results produced by this study indicate past investment performance of market indices over the 1 Jan Dec 2017 time period exclusively and in no way should be considered representative of the past performance of any investment product or predictive of future investment expectations and performance for the municipal market or investment products. All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Diversification does not insure against market loss. Investors should consult with their professional advisors before making any tax or investment decisions. CHART TALK: Opportunities in municipal bonds 8

9 High yield municipals outperformed in 2017 Municipal market overview 2017 Bloomberg Barclays Municipal Index returns (%) We believe high yield municipals continue to offer value year 5-year 10-year 20-year Maturity/type Long (22+) High yield High yield (ex-puerto Rico) Data source: Bloomberg, L.P., year-to-date returns as of 31 Dec Past performance is no guarantee of future results. Returns for the 1, 5, 10, 20 and 22+ year maturities are based on segments of the Bloomberg Barclays Municipal Bond Index: Bloomberg Barclays 1-Year Municipal Bond Index, Bloomberg Barclays 5-Year Municipal Bond Index, Bloomberg Barclays 10-Year Municipal Bond Index, Bloomberg Barclays 20-Year Municipal Bond Index, Bloomberg Barclays Long Bond Municipal Bond Index; High Yield by the Bloomberg Barclays High Yield Municipal Bond Index. All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. High yield or lower-rated bonds and municipal bonds carry greater credit risk, and are subject to greater price volatility. Index returns include reinvestment of income and do not reflect investment advisory and other fees that would reduce performance in an actual client account. Indexes are unmanaged and unavailable for direct investment. CHART TALK: Opportunities in municipal bonds 9

10 Tax rate changes tend to have little effect on municipals Municipal market overview Period Maximum tax rate Bond Buyer 20/10-year Treasury yield Bond Buyer 20/30-year Treasury yield % 87.7% 87.4% % 91.0% 89.0% % 85.7% 85.3% History suggests municipal prices and ratios experience little change when tax policies shift % 90.2% 84.5% % 93.5% 88.8% During the Reagan Era taxes were cut, but municipal bonds produced a return of 15.2% During George W. Bush s presidency taxes were cut, but municipal bonds produced a return of 5.5% During Barack Obama s tenure taxes were raised and the municipal-to-treasury ratio increased 2017 tax reform may increase municipal demand Data source: Bloomberg, L.P.; Maximum Tax Rate, Walters Kluwer, CCH, WBOT2013/029IncomeTaxRates.asp. Past performance is no guarantee of future results. Indices are unmanaged and unavailable for direct investment. CHART TALK: Opportunities in municipal bonds 10

11 The municipal yield curve flattened in 2017 Interest rate environment AAA-rated general obligation yield curve 3.5% 3.0% 31 Dec Dec 2017 A lack of inflation should keep long rates from rising dramatically 2.5% 2.0% 1.5% 1.0% 0.5% 0% Years to maturity Data source: Thomson Reuters MMD as of 31 Dec Past performance is no guarantee of future results. CHART TALK: Opportunities in municipal bonds 11

12 Municipals have been resilient during uncertain environments Interest rate environment Bloomberg Barclays Municipal Bond Index returns (%) Terrorist attacks Corporate accounting scandals 9.60 Fed funds rate raised 17 times Monoline Insurance downgrade Liquidity crisis Municipal default scare Debt ceiling U.S. downgrade Taper tantrum 9.05 Interest rates rise % Average annualized return Data source: Bloomberg, L.P data as of 31 Dec Past performance is no guarantee of future results. All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Index returns include reinvestment of income and do not reflect investment advisory and other fees that would reduce performance in an actual client account. Indexes are unmanaged and unavailable for direct investment. Municipal bonds have weathered numerous storms, including periods of rising interest rates CHART TALK: Opportunities in municipal bonds 12

13 The way rates rise can determine how markets react Interest rate environment Rising rate periods since 1994 Period Feb 1994 to 1 Feb Jun 1999 to 16 May Jun 2004 to 29 Jun 2006 Flexibility and selectivity can be critical in rising rate environments Starting rate level 3.00% 4.75% 1.00% Number of hikes Duration 12 months 10 months 24 months Ending rate level 6.00% 6.50% 5.25% Magnitude 300 basis points 175 basis points 425 basis points Data source: Bloomberg, L.P., Past performance is no guarantee of future results. Data shown applies to the actual time periods noted in the table. One basis point equals.01%, or 100 basis points equal 1%. Different benchmarks and economic periods will produce different results. All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Each period has its own specific factors that may help or hurt the total returns of bonds. These may be economic in nature or technically driven. CHART TALK: Opportunities in municipal bonds 13

14 The short end of the curve does not always outperform when rates rise Interest rate environment Municipal bond market performance during the last three periods of rising rates Period 1 4 Feb 1994 to 1 Feb 1995 Period 2 30 Jun 1999 to 16 May 2000 Period 3 30 Jun 2004 to 29 Jun 2006 Bloomberg Barclays Municipal Index 6-month return before Total return during Change in yields during 6-month return after Total return across three periods 6-month return before Total return during Change in yields during 6-month return after Total return across three periods 6-month return before Total return during Change in yields during 6-month return after Total return across three periods 1-year 2.45% 2.06% +204 bps 3.77% 8.50% 1.35% 3.11% +92 bps 2.99% 7.63% 0.28% 3.40% +188 bps 2.08% 5.85% 3-year 3.35% 0.70% +175 bps 5.22% 9.51% 0.66% 2.43% +80 bps 3.89% 7.12% -0.31% 3.46% +132 bps 2.57% 6.78% 5-year 4.38% -0.95% +152 bps 6.83% 10.45% -0.21% 1.90% +68 bps 5.02% 6.78% -0.90% 4.76% +77 bps 3.22% 7.16% 10-year 6.13% -3.49% +142 bps 8.55% 11.19% -1.73% 1.71% +53 bps 6.92% 6.87% -0.81% 7.81% +30 bps 4.77% 12.05% 20-year 6.53% -4.91% +128 bps 7.64% 9.03% -1.13% -1.04% +70 bps 8.85% 6.50% -0.18% 12.53% -20 bps 5.52% 18.53% 22+year 6.73% -6.21% +128 bps 8.29% 8.40% -1.68% -2.68% +75 bps 9.69% 4.95% -1.26% 15.93% -47 bps 6.17% 21.53% Yield curve flattened 76 bps Yield curve flattened 17 bps Yield curve flattened 235 bps Best performer: 10-year Best performer: 1-year Best performer: 22+ Data source: Bloomberg L.P., Past performance is no guarantee of future results. Data shown applies to the actual time periods noted in the table which represent the last three times the fed funds rate was rising. Each period has its own specific factors that may help or hurt the total returns of bonds. These may be economic in nature or technically driven. One basis point equals.01%, or 100 basis points equal 1%. Hypothetical examples are shown for illustrative purposes only and do not represent the performance of an actual portfolio. Individual investor results will vary. Different benchmarks and economic periods will produce different results. All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. The change in the shape of the yield curve can affect how markets perform CHART TALK: Opportunities in municipal bonds 14

15 Staying the course in municipals usually benefits investors Interest rate environment Hypothetical return of $100,000 during times of yield spikes Initial investment After yield spike 3 months 6 months 12 months Broad municipal market $100,000 $88,975 $99,790 $100,221 $106,588 $100,000 $93,543 $93,312 $100,585 $107,590 $100,000 $93,243 $95,820 $98,998 $102,902 When municipal yields increased by at least 100 basis points in less than one year, municipal bond prices recovered within 12 months High yield municipal market $100,000 $78,748 $84,774 $91,998 $104,523 $100,000 $94,519 $96,841 $101,815 $108,232 $100,000 $89,300 $96,640 $96, CHART TALK: Opportunities in municipal bonds 15 $102,463 Data source: Bloomberg L.P. Based on returns of the Bloomberg Barclays Municipal Bond Index and the Bloomberg Barclays High Yield Municipal Bond Index. The 2008 period spans 30 Sep Dec 2008; the 2010 period spans 31 Oct Jan 2011; the 2013 period spans 30 Apr Aug Different benchmarks and economic periods will produce different results. All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. High yield or lower-rated bonds and municipal bonds carry greater credit risk, and are subject to greater price volatility. Index returns include reinvestment of income and do not reflect investment advisory and/or other fees that would reduce performance in an actual client account. All indices are unmanaged and unavailable for direct investment. Hypothetical performance is no guarantee of future results.

16 Municipal credit health is improving Credit health Moody s upgrades vs. downgrades Upgrades Downgrades Third quarter 2017 (number of rating changes) 104 Despite headline risks, municipal upgrade are exceeding downgrades All public finance Tax and appropriation Revenue YTD 2017 through 30 Sep 2017 (number of rating changes) All public finance Tax and appropriation Revenue Data source: Moody s Investor Service, U.S. Public Finance, Sector In-Depth, 30 Nov CHART TALK: Opportunities in municipal bonds 16

17 Ex Puerto Rico, defaults remain extremely rare Credit health Municipal payment defaults ($ billions) Market total Excluding Puerto Rico Puerto Rico Data source: Municipals Weekly, Bank of America/Merrill Lynch Research, 1 Dec Data as of 1 Dec 2017, most recent data available. Data represents defaults on the entire universe of bonds, both rated and unrated, and includes Puerto Rico defaults. Defaults have climbed, but meaningful increases are due to Puerto Rico There were seven Chapter 9 bankruptcy filings in Puerto Rico made up 94% of 2016 defaults. CHART TALK: Opportunities in municipal bonds 17

18 Puerto Rico bonds continue to underperform Credit health Puerto Rico vs. the broader municipal market S&P Municipal Bond High Yield Index S&P Municipal Bond Index S&P Municipal Bond Puerto Rico Index $2.0 Since the 2013 selloff, Puerto Rico bonds have failed to regain ground Cumulative return ($) $1.5 $1.0 $0.5 10/07 12/08 12/09 April 2010 Moody s upgrades Puerto Rico to A3 from Baa3 12/10 12/11 12/12 12/13 February 2014 S&P/Moody s downgrade Puerto Rico to below investment grade 12/14 12/15 12/16 12/17 Data source: Morningstar, 1 Oct Dec Past performance is no guarantee of future results. Nuveen Asset Management internally downgraded Puerto Rico bonds in September High yield or lower-rated bonds and municipal bonds carry greater credit risk, and are subject to greater price volatility. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Indices are unmanaged and unavailable for direct investment. CHART TALK: Opportunities in municipal bonds 18

19 Municipal bonds have fared better than similarly rated corporates Credit health Moody s average cumulative default rates, Municipals vs. corporates 5-year history 10-year history Rating Corporate Municipal Difference Corporate Municipal Difference Aaa 0.09% 0.00% 0.09% 0.38% 0.00% 0.38% A and Baa municipal bonds have historically had default rates close to those of Aaa corporate bonds Aa 0.30% 0.01% 0.29% 0.78% 0.02% 0.76% A 0.77% 0.03% 0.74% 2.22% 0.07% 2.15% Baa 1.63% 0.16% 1.47% 3.93% 0.40% 3.53% Ba 8.39% 2.34% 6.05% 16.28% 4.23% 12.05% B 21.90% 12.43% 9.47% 36.17% 17.77% 18.40% Caa-C 35.59% 20.26% 15.33% 50.31% 26.41% 23.90% Data source: Special Comment: U.S. Municipal Bond Defaults and Recoveries, , Moody s Investors Service. Past performance is no guarantee of future results. The universe represents 16,000 bonds rated by Moody s in this study. All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. High yield or lower-rated bonds and municipal bonds carry greater credit risk, and are subject to greater price volatility. Aaa,Aa,A, and Baa are investment grade ratings; Ba,B and Caa/Ca/C are below-investment grade ratings. CHART TALK: Opportunities in municipal bonds 19

20 Wide municipal yield spreads reveal market inefficiencies Credit health Range of yields for A-rated municipal and corporate bonds (%) Highest Average Lowest Municipals Corporates Maturity 2-year 5-year 10-year 20-year 30-year Data source: S&P/Investortools and BofA Merrill Lynch, 31 Dec Past performance is no guarantee of future results. Universes are the A-rated bonds in the S&P Municipal Bond Index and the BofA Merrill Lynch U.S. Corporate, Government & Mortgage Index. Any reference to municipal credit ratings refers to the highest rating given by one of the following national rating agencies: S&P, Moody s or Fitch. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below investment grade ratings. Dispersion describes the size of the range of values expected for a particular variable. Yield refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment s cost, its current market value or its face value. Wide yield dispersions of similarly rated bonds make active and ongoing credit research critical to make risk/reward decisions CHART TALK: Opportunities in municipal bonds 20

21 2017 new issuance was slightly less than 2016 State of the market New capital versus refunding issuance Issuance ($ billions) New capital Refunding Estimate $500 $400 $300 $ billion Average total issuance 194 billion New capital average Favorable supply/demand dynamics act as a tailwind for municipals 2017 new issuance was down nearly 2% versus $100 $ E Data source: Securities Industry and Financial Markets Association (SIFMA.org), U.S. Bond Market Issuance and Outstanding, 31 Dec Estimate for 2018 from Nuveen Asset Management. CHART TALK: Opportunities in municipal bonds 21

22 Despite an increase in assets, municipal market inventory is falling State of the market Municipal assets vs. available inventory Broker/dealer municipal inventory ($ billions) Broker-dealers (left) $80 $70 $60 $50 $40 $30 $20 Mutual funds (right) 1Q Q 2017 $646 billion (up 71%) $66 billion $378 billion $800 $700 $600 $500 $400 $300 $200 Municipal mutual fundassets ($ billions) Individual investors have less access to municipal supply, making it harder to build portfolios $10 $20 billion (down 70%) $100 $ $0 Data source: Bond Buyer and Federal Reserve Flow of Funds. Data as of 30 Jun 2017, most recent available. CHART TALK: Opportunities in municipal bonds 22

23 Municipals look attractive relative to sovereign debt State of the market Global bond yields and ratings Yield (%) 2-year 10-year 30-year Linear (30-year) 6% 5% 4% 3% 2% With many global bond yields in low or negative territory, municipal yields appear quite attractive 1% 0% -1% Switzerland Aaa/AAA Japan A1/A Germany Aaa/AAA Denmark Aaa/AAA Austria Aaa/AA+ United Kingdom Aa1/AAA United States Aaa/AA+ Municipal Bonds Aaa/AAA Municipal Bonds TEY Aaa/AAA Data source: Bloomberg, L.P., 31 Dec Past performance is no guarantee of future results. Municipal bonds represented by the Municipal Market Data (MMD) scale. Tax equivalent yields shown based on highest marginal tax rate of 43.4%. CHART TALK: Opportunities in municipal bonds 23

24 Tax-free municipal bond yields remain compelling State of the market AAA municipals value relative to Treasuries 210% 10-year MMD/UST ratio 30-year MMD/UST ratio Municipals appear inexpensive relative to Treasuries 180% 150% 120% Average ratios since 1984: 30-year bond ratio: 93% 10-Year bond ratio: 84% 90% Current 30-year: 93% Current 10-year: 83% 60% 1/84 12/85 12/87 12/88 12/91 12/93 12/95 12/97 12/99 12/01 12/03 12/05 12/07 12/09 12/11 12/13 12/15 12/17 Data source: MMD Thompson/Reuters for fair value Municipal 10- and 30-Year Index AAA General Obligation bonds; Bloomberg for 10- and 30-year U.S. Treasury yields, 1 Jan Dec Past performance is no guarantee of future results. Represents the relative value of municipal yields to Treasury yields. All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Individual tax rates may vary. Some income may be subject to the federal alternative minimum tax (AMT) or capital gains taxes. CHART TALK: Opportunities in municipal bonds 24

25 Yield spreads have increased since the credit crisis and remain wide State of the market Credit spreads vs. AAA-rated municipal bonds Yield spread (%) AA AA BBB Corporate accounting Scandals Lehman brothers Bankruptcy Bond insurers Ratings cut Municipal bond market collapse predicted Taper tantrum Opportunities exist for those who know how to assess risk in lower-rated segments of the market /99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 Data source: S&P/Investortools from 1 Jan Dec Past performance is no guarantee of future results. Chart shows yield difference between the AAA-rated Municipal Bond Yield Curve and the AA-, A- and BBB-rated Municipal Bond Yield Curves. CHART TALK: Opportunities in municipal bonds 25

26 High yield municipal spreads remain wide despite strong performance State of the market Bloomberg Barclays High Yield Index versus AAA yields Basis points HY-MMD AAA HY-MMD AAA Ex-Puerto Rico HY-AAA spread average: 258 bps Pre-crisis average: 190 bps Spreads may represent value in high yield municipals for those who know where to look 273 bps ex-puerto Rico 271 bps /95 12/97 12/99 12/01 12/03 12/05 12/07 12/09 12/11 12/13 12/15 12/17 Data sources: Municipal Market Data AAA-rated bonds, Bloomberg Barclays High Yield Municipal Index, Thompson Reuters, 31 Oct Dec Charts show data to the earliest period available. Past performance is no guarantee of future results. High yield or lowerrated bonds and municipal bonds carry greater credit risk, and are subject to greater price volatility. Ratings shown are from S&P and are subject to change. AAA,AA,A, and BBB are investment grade ratings; BB,B, CCC/CC/C and D are below-investment grade ratings. Indices are unmanaged and unavailable for direct investment. Pre-crisis period is 31 Oct Dec CHART TALK: Opportunities in municipal bonds 26

27 High yield municipals are cheap relative to high yield corporates State of the market Bloomberg Barclays High Yield Municipal vs. Bloomberg Barclays High Yield Corporate Yield (%) Municipal high yield Corporate high yield Ratio Average 25% 20% Ratio Recent selling pressure in high yield municipals may have created value 15% 10% Current ratio: 90% Average ratio: 79% 5% 0.50 Current corporate yield: 5.72% Current muni yield: 5.14% 0% /95 12/97 12/99 12/01 12/03 12/05 12/07 12/09 12/11 12/13 12/15 12/17 Data source: Bloomberg L.P., 31 Oct Dec Past performance is no guarantee of future results. Representative Indexes: High Yield Municipal: Bloomberg Barclays High Yield Municipal Index; High Yield Corporate: Bloomberg Barclays U.S. High Yield Corporate Index. High yield or lower-rated bonds and municipal bonds carry greater credit risk, and are subject to greater price volatility. Indices are unmanaged and unavailable for direct investment. CHART TALK: Opportunities in municipal bonds 27

28 Next steps: Five reasons to partner with Nuveen asset management Nuveen Asset Management leadership Nuveen Asset Management believes five key differentiators are important to creating portfolio growth Credit research Institutional access Institutional trade execution* Tax-aware investing Active portfolio oversight The experienced research team evaluates municipal bonds and sectors, seeking to find value in bonds that the general public may have overlooked. We navigate the inefficient municipal bond market through established relationships with more than 100 national and regional dealers. A large presence in the market provides greater access to inventory to find bonds in appropriate sizes and at institutional prices. The ability to trade at institutional prices allows the team to efficiently capture tax losses and use them to offset gains. By actively trading bonds, the team seeks to sell appreciated bonds, capture gains and purchase bonds that have the potential to enhance overall portfolio returns. *Institutional trade execution applies primarily to municipal bond trading as part of ongoing account management and generally does not include sales of legacy securities contributed to new or existing accounts or in connection with termination and liquidation instructions. Nuveen Asset Management, LLC ( NAM ) seeks to expeditiously and efficiently effect sales of legacy securities contributed to new or existing accounts or in connection with termination and liquidation instructions, generally by directing the execution of sale to the relevant broker-dealer/custodian designated by the client s managed account program, subject to program limitations. Primarily due to the time constraints and lot sizes applicable to these transactions, and because the full range of trading techniques is generally not available (including aggregation), the prices received in these transactions may be less favorable than the prices that could be attained for sales of securities selected by NAM as part of ongoing management. Clients always reserve the right to fund accounts with cash as opposed to legacy securities and to keep any securities in their accounts upon termination of services. CHART TALK: Opportunities in municipal bonds 28

29 Index definitions The Municipal Market Data 10- and 30-Year insured scales are compilations of the previous day s actual trades for AAA-rated 10- and 30-year insured bonds, respectively. The Bloomberg Barclays 1-Year Municipal Bond Index measures the returns of general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds, all in the maturity range of 1 to 2 years. The Bloomberg Barclays 3-Year Municipal Bond Index measures the returns of general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds, all in the maturity range of 2 to 4 years. The Bloomberg Barclays 5-Year Municipal Bond Index measures the returns of general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds, all in the maturity range of 4 to 6 years. The Bloomberg Barclays 10-Year Municipal Bond Index measures the returns of general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds, all in the maturity range of 8 to 12 years. The Bloomberg Barclays 20-Year Municipal Bond Index measures the returns of general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds, all in the maturity range of 17 to 22 years. The Bloomberg Barclays Global Aggregate Unhedged Index measures the performance of global bonds. It includes government, securitized and corporate sectors and does not hedge currency. The Bloomberg Barclays High Yield 2% Issuer Capped Index measures the market of USD-denominated, noninvestment grade bonds and limits each issue to 2% of the index. The Bloomberg Barclays High Yield Municipal Index covers the USDdenominated, below investment grade tax-exempt bond market. The Bloomberg Barclays Long Credit Index measures the performance of the long-term sector of the United States investment bond market, which includes investment-grade corporate debt and sovereign, supranational, local authority and non-united States agency bonds that are dollar denominated and have a remaining maturity of greater than or equal to 10 years. The Bloomberg Barclays Municipal Intermediate Index is a subset of the Bloomberg Barclays Capital Municipal Bond Index including maturities of five to ten years. The Bloomberg Barclays U.S. Aggregate Bond Index covers the U.S. investment grade fixed rate bond market. The Bloomberg Barclays U.S. Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable corporate bond market. The Bloomberg Barclays U.S. Corporate Investment Grade Index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity and quality requirements. To qualify, bonds must be SEC-registered. Securities must be an investment grade credit security. The Bloomberg Barclays U.S. Government/Credit Intermediate Index is an unmanaged index that consists of dollar-denominated, investmentgrade, publicly-issued securities with a maturity between one and ten years that are issued by both corporate issuers and non-corporate issuers. The Bloomberg Barclays U.S. Government-Related Index includes debt guaranteed, owned and sponsored by the U.S. government; it does not include debt directly issued by the U.S. government. The Bloomberg Barclays U.S. Securitized Index is a composite of asset-backed securities, collateralized mortgage-backed securities (ERISA-eligible) and fixed rate mortgage-backed securities. The Bloomberg Barclays U.S. Treasury Index includes public obligations of the U.S. Treasury. The Bloomberg Barclays High Yield Municipal Bond Index is an unmanaged index composed of municipal bonds rated below BBB/Baa. The Bloomberg Barclays Municipal Bond Index covers the USDdenominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds. The Bloomberg Barclays Long Municipal Bond Index measures the returns of general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds, with maturities of more than 22 years. The Bloomberg Barclays U.S. Treasury Index includes public obligations of the U.S. Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index. In addition, certain special issues, such as state and local government series bonds (SLGs), as well as U.S. Treasury TIPS, are excluded. STRIPS are excluded from the index because their inclusion would result in double-counting. Barclays Capital U.S. The BofA Merrill Lynch U.S. All Capital Securities Index is a subset of the BofA Merrill Lynch U.S. Corporate Index including all fixed-to-floating rate, perpetual callable and capital securities. The BofA Merrill Lynch U.S. Corporate, Government and Mortgage Index is a broad-based measure of the total rate of return performance of the U.S. investment grade bond markets. The Index is a capitalization weighted aggregation of outstanding U.S. treasury, agency and supranational, mortgage pass-through, and investment grade corporate bonds meeting specified selection criteria. The FTSE NAREIT All Equity REITs Index contains all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. The MSCI Emerging Markets Index captures large and mid cap representation across 23 emerging markets (EM) countries. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The S&P AAA Municipal Bond Index is a market value-weighted benchmark index designed to measure the performance of bonds rated AAA by S&P. The S&P BBB Municipal Bond Index is a market value-weighted benchmark index designed to measure the performance of bonds rated BBB by S&P. The S&P Short Duration Municipal Yield Index tracks the municipal bond market with maturities from 1 to 12 years.

30 Glossary Additional disclosures A word on risk The Alternative Minimum Tax (AMT) was originally enacted to ensure that all taxpayers pay their fair share of the costs of government. Determining if a taxpayer is subject to AMT requires tax liability be calculated twice: first using the regular tax rules and then a second time using the AMT rules. Only if the AMT calculation produces a higher tax liability than the regular tax rules, is a taxpayer subject to the Alternative Minimum Tax. Sharpe Ratio (Risk-Adjusted Return) is a risk-adjusted return measure calculated using standard deviation and excess return to determine reward versus unit of risk. The higher the Sharpe Ratio, the better the historical risk-adjusted performance. Standard Deviation (Risk) is a statistical measure of the historical volatility of a mutual fund or portfolio; the higher the number, the greater the risk. This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor s objectives and circumstances and in consultation with his or her advisors. The comments and statements made are based solely upon the opinions of Nuveen Asset Management and the data available at the time of publication, which may change without notice. There is no assurance that any predicted results will actually occur. This brochure is provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Certain information was obtained from third-party sources, which we believe to be reliable, but is not guaranteed. Nuveen Asset Management, LLC ( NAM ) seeks to expeditiously and efficiently effect sales of legacy securities contributed to new or existing accounts or in connection with termination and liquidation instructions, generally by directing the execution of sale to the relevant broker-dealer/custodian designated by the client s managed account program, subject to program limitations. Primarily due to the time constraints and lot sizes applicable to these transactions, and because the full range of trading techniques is generally not available (including aggregation), the prices received in these transactions may be less favorable than the prices that could be attained for sales of securities selected by NAM as part of ongoing management. Clients always reserve the right to fund accounts with cash as opposed to legacy securities and to keep any securities in their accounts upon termination of services. Investing in municipal bonds and a municipal bond investment vehicle involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. In addition, the callability of bonds may increase interest rate risk exposure in the Laddered portfolios. Upon call, a client may be confronted with a less favorable interest rate environment than the one that existed when the original bond was purchased. Investors should contact a tax advisor regarding the suitability of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/ losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. Nuveen Asset Management is not a tax advisor. Consult your professional advisors before making any tax or investment decisions. This information should not replace a client s consultation with a professional advisor regarding their tax situation. Nuveen Investments Advisers, LLC ( NIA ), a registered investment adviser, provides Managed Account marketing services for its affiliates that are registered investment advisers, including Nuveen Asset Management, LLC. All such affiliates are also affiliates of Nuveen, LLC.

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