A potential change in the tax status of certain municipal bonds could open up an opportunity for investors, according to Nuveen. Interest income from munis is exempt from federal taxes. Further, if the investor lives in the state in which the bond was issued, the income is free of state taxes. That makes them a favored asset for wealthy investors, especially those in high-tax states. However, there has been some concern about the fate of the exemption as Congress takes up President Donald Trump’s tax cuts . The president wants to extend the 2017 tax cuts that are set to expire this year and lawmakers are looking for ways to offset that impact. Eliminating the muni bond exemption is one of about 200 options listed in a document from House lawmakers on the Senate’s website. Nuveen expects muni bonds will retain their exemptions. However, if there are any changes it would likely be to private activity bonds, said Dan Close, the firm’s head of municipals. That includes bonds for hospitals and airports. Such changes would “chip away a bit” at the bonds’ tax-exempt status, he said, noting that “these are anywhere from 20% to 25% of our market.” Private activity bonds have some characteristics of the corporate market, he explained. For instance, a hospital could file bankruptcy under Chapter 11 — a broader reorganization law — versus Chapter 9, which is for municipalities, he said. “If these had to stand on their own and issue in the taxable market, they might have a greater receptivity than other parts of the municipal market,” Close said. Taking advantage of uncertainty The uncertainty has provided an opportunity for investors interested in private activity bonds because any changes to their tax-exempt status would not be retroactive. “There’s a near-zero chance that existing muni bonds don’t stay tax exempt, meaning that they’ll be grandfathered in,” Close said. “If you have that as your mindset or your base — buying private activity bonds, bonds for private higher ed, for health care, for airports — there will be a scarcity factor if those are taxable down the road,” he added. “Then you also have that secondary fact of less new issue supply, which could be helpful.” That said, not all private activity bonds are created equal. There are “haves” and “have nots,” Close said. “Those credits that are good are going to get better, and those credits that are not currently doing well are going to get worse,” he said. In higher education , larger and wealthier institutions appear to have inelastic demand, while smaller colleges are struggling, he noted. The latter group has faced challenges with enrollment and expenses, he said. One name that is held in the Nuveen Intermediate Duration Municipal Bond Fund (NUVBX) is Boston University. NUVBX 1Y mountain Nuveen Intermediate Duration Municipal Bond Fund Meanwhile, in health care, Close favors larger systems that have robust liquidity and strong market positions. “These systems were better able to weather the pandemic and labor inflation challenges than many of their smaller, single-site counterparts with limited balance sheets,” he said. The firm holds CommonSpirit Health Obligated Group in its Nuveen High Yield Municipal Bond Fund (NHMRX) .
