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- NMCO has been our top tax-exempt pick across a number of our Income Portfolios which has paid off very well since inception and year-to-date.
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Welcome to another weekday blog post from Systematic Income.
We have been overweight high-yield munis since the inception of our Income Portfolios for three reasons. First, the sub-sector was very attractively valued coming out of the March market crunch. Secondly, its yield level was significantly higher than that of the broader muni sector. And thirdly, it was likely to remain more resilient in the face of rising rates. The Nuveen Municipal Credit Opportunities Fund (NMCO) was out most overweight fund in the sector.
Fast forward to today and the fund has topped the muni CEF sector, delivering close to a double-digit price return year-to-date in the face of sharply higher risk-free rates and a middling performance across the rest of the muni sector.
What's next for NMCO?
We continue to maintain an allocation to the fund across our High Income and Muni Income Portfolios, however, we recognize that today's starting point looks less attractive for the fund than it did when the fund was initially added to our Portfolios. The state and local government assistance in the stimulus bill will most strongly support the more cyclical holdings of a fund like NMCO than the investment-grade bonds that are more common in the rest of the sector. High-yield munis also continue to maintain a credit spread cushion over investment-grade rated bonds which should allow them to behave in a more resilient fashion during a period of rising rates.
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Analyst's Disclosure: I am/we are long NMCO.
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