NBB: A Good Option For Taxable Muni Exposure, But Upside Limited

Summary

  • NBB sits just under its 52-week high and sports a premium to NAV of almost 3%.
  • While this fund has been a reasonable performer over the past few months, I believe getting a bit more cautious now makes sense.
  • Taxable muni CEFs offer a way to boost yield without going down in credit quality. Therefore, I see them as a valid hedge but would be leery of over-paying for that exposure.
  • The recent stimulus measure did not include much direct aid to state and local governments. If this story continues in 2021, muni bonds of all stripes face significant risks.
  • Looking for more investing ideas like this one? Get them exclusively at CEF/ETF Income Laboratory. Get started today »

Main Thesis

The purpose of this article is to evaluate the Nuveen Taxable Municipal Income Fund (NYSE:NBB) as an investment option at its current market price. I will continue to use muni bonds as an equity hedge in the new year and see taxable munis as a reasonable way to increase my portfolio's risk without taking on too much credit risk. NBB is made up of investment-grade bonds, and its recent UNII report illustrates the fund is over earning its current distribution rate. When we couple this with NBB's relative value against other taxable muni CEFs, it seems like a reasonable play right now.

Despite these positives, there are also reasons to be cautious. NBB does offer a relative value for the sector, but in isolation its price is not cheap. The fund has a 3% premium to NAV, well above its average for the year. Further, NBB is disproportionately exposed to bonds from California and New York, two of the epicenters of the Covid-19 crisis. With state finances to be an issue in 2021, especially without aid from D.C., investors should recognize the risks in this sector are quite different now than they are under normal conditions.

Background

First, a little background on NBB. The fund is run by Nuveen and its primary objective is "current income through investments in taxable municipal securities." Currently, NBB trades at $23.52/share and yields 4.75% annually, paying monthly distributions. I initiated coverage on NBB back in August, and put a bullish rating on the fund, as I am generally optimistic on the taxable muni space. In hindsight, this was a reasonable outlook, as NBB has seen a decent gain since that time, as shown below:

Source: Seeking Alpha

As we approach 2021, I thought it was an opportune time to take another look at

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This article was written by

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CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

Macro-focused investor, working for a major U.S. bank. I grew up in New York, but escaped to North Carolina. I was a D1 athlete in college (men's tennis) and compete competitively to this day. My Bachelor's and MBA are both in Finance.

I provide reasoned, fact-based analysis of different funds and sectors. I list my portfolio here so readers can gain insight into what I am buying/holding, what I'm not, and how that lines up with the views I present in my articles. 

Broad market: VOO; QQQ; DIA, RSP

Sectors: VPU / BUI; VDE, RYE; KBWB; XRT

Non-US: EWC; EWU; EIRL; EWA

Dividends: DGRO; SDY, SCHD

Municipals/Debt Funds: NEA, BBN, PDO, PCK, VCV, PML

Stocks: WMT, JPM, MAA, SWBI, MCD, DG, WM

Cash position: 25%

Disclosure: I am/we are long BBN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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