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Main papers and background
The purpose of this article is the Nuveen Dynamic Municipal Opportunities Fund (New York Stock Exchange: NDMO) as an investment option. This is a diversified municipal bond fund with various sectors. Allocations and Credit Ratings.its primary Purpose “Seek total return through income that is exempt from regular federal income tax and capital appreciation.”
We’ve covered NDMO many times in the past, including one year ago when 2022 began. At that time, I was cautious about Munis in general, but I was particularly interested in NDMO. Looking back over the past year, I’ve been somewhat cautious, but I should have been more bearish. Highly leveraged, non-IG quality funds, in principle, really took a hit. The NDMO was immune to these macro forces and suffered very visibly.
Fund performance (seeking alpha)
Looking ahead to the year ahead, I don’t see this slump continuing. Even with leveraged options, it’s unusual for a municipal fund to see him fall nearly 30% in his one year. As a betting guy it’s just not what I would expect. But that doesn’t mean the opportunities here are without risk. NDMOs continue to be exposed to rising interest rates and deteriorating credit conditions. In addition, we believe there is a very real risk that the distribution will be reduced in the short term. This balances his view that his 8% discount on NAV provides an attractive buying opportunity. In short, I think the ‘Hold’ rating still makes sense.
value looks attractive
Let’s look at some of the positives first. The most important thing is the valuation of the fund. In January 2222, NDMO had a premium of about 1% over his NAV. I didn’t think this valuation was overly worrying, but it wasn’t exactly in the “value” realm either, and today the NDMO says he sits at a discount of over 8% to NAV, so The story is completely different. This is generally a buy signal for me personally.
Quick Fund Facts (Nuveen)
As the stock price has fallen, the fund’s current yield has also fallen. The distribution rate has been stable and the sharp drop in market prices has allowed the fund to offer investors his 9% yield on new positions.
current distribution | Current stock price (as of January 3, 2023) | current yield |
$.0765/share | $10.21/share | 8.99% |
Source: Seeking Alpha
From a high-level perspective, NDMO may seem too good. A tax-friendly yield of 9% with a buy-in point that is heavily discounted NAV is a trait I usually consider very favorable. To be fair, these are the key points why I’m not bearish on this fund. Even if some risks exist (discussed below), buy now and this will surely limit the downside.
My biggest concern is ration cuts
Faced with some headwinds, the first thing that comes to mind for me is the potential for revenue cuts. The good news here is that I believe NDMOs will hold up pretty well if the cuts are modest.The discounted NAV and the 9% lower yield make it a very attractive source of income for investors. The reality of leaving Factoring in tax savings, the fund can easily cut its distributions, but still offer investors higher real yields than most fixed income sectors can offer.
Nonetheless, cutting the CEF distribution usually lowers the stock price. This is the basis of my “holding” theory. With revenue cuts looming, I think it’s likely that more attractive buy-in points will come first.
This may leave the reader wondering why Confidence in potential loss of income. Part of this has to do with the fact that many of his CEFs in municipalities (including many from Nuveen) are already experiencing cuts in his 3rd and 4th quarters of 2022. . Much longer without becoming a victim of that tendency. Supporting this idea is the fact that the latest data from Nuveen indicates that his NDMO has ended. half Its distribution resulting from the return of capital:
Income index (Nuveen)
A counterargument is that if the NDMO hasn’t been forced to be cut yet, it may not be cut at all. This is a fair point, and one that the reader here should consider when determining the value of NDMO.if the fund won’t Cut, probably only upwards from now on.
However, given that the Fed is likely to continue raising rates in the first half of this year, I think a rate cut is likely. We expect one or two more moves of 0.50 basis points. While this is generally positive for equities and bonds over the long term, it poses a challenge early in the year.
The relevance here is that inflation continues to rise. This continues to be a global problem, and the Fed may be forced to raise its benchmark rate again at its next meeting.
CPI level (World Bank)
Until this situation changes dramatically, the Fed will remain hawkish and short-term borrowing costs will continue to rise. This impacts NDMO as it uses considerable leverage.
NDMO Leverage (Nuveen)
This dynamic puts pressure on the fund’s return generation and is central to why I see the real potential for return reductions. ) should immediately drop dramatically. That seems unlikely to me, so I’m not going to buy an NDMO just yet.
Note for non/low rated Munis Warrants
Digging deeper into NDMO, we come to the following reasons to be careful. This is the general composition and holdings of the fund. Of course, the current yield of 9% isn’t just the market price discount to the underlying value. It also stems from the fact that more than half of the holdings are rated junk or not rated at all. This usually indicates below IG quality.
NDMO credibility (Nuveen)
I’m not trying to be overly alarming here. Municipal bonds, whether IG or below IG, tend to have lower default rates than similarly rated corporate bonds. The sector has had a long history of stability, which could continue into 2023. Moreover, even within the corporate realm, the credit environment is not terrible. After accumulating cash reserves in an era of ultra-low interest rates, the number of bankruptcies declined year-on-year in the second half of 2022.
Bankruptcy filing (U.S. company) (S&P Global)
My point here is that even with some turbulence ahead, both the corporate and local government sectors will be well supported. Both corporate and municipal issuers have stuck to borrowing at low interest rates over the past few years, and the general economic recovery has improved cash reserves and “rainy day” funding for both. What this tells me is that the credit markets are not as volatile this year as last year.
Unfortunately this is marked with an asterisk. I think this year’s credits have a positive backdrop, but a continued deep recession would ruin that theory. This not only leads to lower corporate profits, but also lower tax revenues for local governments. The logic is that lower tax revenues put pressure on lower-rated municipalities first. This is a problem for his NDMO.
Aside from the general weakness that may prevail in the local government sector, NDMOs also have a sizeable share in the transport sector. About one-seventh of CEF-covered bonds belong to this sector. This is an area that offers several opportunities for investors. As the economy improves, more people will travel. In addition, the growing labor force contributes to an increase in the number of people using public transportation such as trains, subways and buses. Investors have been cautious when buying this sector in 2022, so there is inherent value here. It may become. Normally, I’d be in this camp — and I’m in the long term. This prospect extends to transportation municipal bonds, as does my broader prospect that he could get an NDMO at a better price if the investor waits patiently.
Munis is a reasonable play if stocks are expected to continue to fall
My final thoughts are considering the whole municipal bond. This relates to his NDMO and other municipal funds that readers are considering. As my followers know, I am Muniburu at this point and beyond 2023. This is especially true for investors who believe stock prices will continue to fall.
The logic here is that bonds tend to outperform when stocks fall. In general, stocks are inversely correlated.
Performance in 2022 (Stocks/Bonds) (Yahoo Finance)
My understanding here is that 2022 was an extraordinary year. Does that necessarily mean 2023 will be different? Of course not. Massive losses are possible in both categories. But history does not support that view, nor does the underlying market fundamentals. With recession fears on the horizon, stocks may start to fall this year (the first day of trading somewhat confirmed this!). If this continues or volatility rises overall, bonds could be a good place to hide. This makes NDMOs and many other municipal CEFs a viable strategy.
Conclusion
NDMO’s 2022 has been a rough year, but more pain may lie ahead. The good news is that the big drop offers investors a surprisingly good buying opportunity compared to most of last year. NDMO will rally if Munis sees a wide rebound. With current yields and a hefty discount to his NAV, there is no doubt that it will eventually attract buyers, but be careful. We expect the dividend to be cut in the near term, which will almost certainly encourage investors to lower their purchase price. In short, I’ll keep his NDMO on my radar as an intercom play, but be patient in the hopes that you can get this one after another.