NAD: A Proxy For Investment Grade Corporate Exposure

2025-05-29 11:47:09 ET

Summary

• The credit cycle is arguably deteriorating. Thus, we see investors moving out of corporate credit and into Municipal bonds with hybrid general obligation and revenue exposure.
• Nuveen Quality Muni Income Fund seems like a prime candidate given its GO and revenue exposure. Moreover, it embodies the excess TEY-treasury spreads on offer.
• Some might oppose its leveraged strategy due to the effect on its expense ratio and the risks leverage adds in down markets. However, we see lower funding costs emerging.
• The vehicle has primarily relied on income for distributions in recent years but ROC has played a more noticeable role since last year.
• In essence, we see credit risk moving materially higher, leading to investors seeking lower credit exposure while being comfortable with levered exposure when interest rates shift down.

Nuveen Quality Muni Income Fund (NYSE: NAD ) , a municipal bond closed-end fund is discussed today. The idea behind our coverage follows our recent bearish rating of LQD ETF ( LQD ). We believe investment grade corporate bonds might get hit by option-adjusted spread widening and delayed convexity effects in late 2025/early 2026, which is why we downgraded our outlook on LQD ETF to Sell. Since then we've looked for credit risk-exposed proxies and stumbled upon NAD CEF, which we think provides a solid investment grade corporate alternative, especially to those in search of leveraged exposure....

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