Select segments of the fixed income market are offering compelling opportunities as bond yields march higher, according to Saira Malik, chief investment officer at Nuveen. Treasury yields climbed on Friday on the heels of a hot May jobs report . Payrolls grew by 172,000 last month, surpassing the Dow Jones consensus call for 80,000. The yield on the 10-year Treasury rose as high as 4.548%, while the rate on the 2-year note touched 4.178%. Still, Malik told CNBC that she spots an emerging opportunity in high-yield municipal bonds. In addition to their attractive yields, muni bonds also have an added tax benefit, which makes them attractive to investors in higher tax brackets. The interest income isn’t taxed on the federal level and it is exempt from state levies if the holder lives within the state the bond is issued. The assets lagged the market last year due to high supply, but they are catching up this year, said Malik, who oversees the firm’s $1.4 trillion in assets under management. She specifically likes the high-yield corner of the muni market because is higher quality than it has been in the past. It is also enjoying strong fundamentals, she said. “States have very strong rainy day funds, high savings rates because of the strength of the U.S. economy,” she said. Tax-equivalent yields near 10% Those solid rainy day funds make Malik comfortable wading into an area that is lower rated, and therefore riskier, than the investment-grade munis market. Plus, the yield compensates investors for the risks involved, she said. “Their tax-equivalent yields are very strong,” Malik said. “They’re at almost 10%.” Tax equivalent yield refers to the rate a taxable bond would have to pay in order to generate the same after-tax income as a municipal bond. In addition, munis have a low correlation with stocks — so they provide good diversification benefits, she said. High-yield munis can also be a play on the artificial intelligence build out because they are financing America’s infrastructure, she said. “People talk about the build out of AI and data centers, and the shift to renewable energy, and the electrification of the economy that we need, and also bringing our supply chains closer to home,” Malik said. “High yield municipal bonds are another way to benefit from that shift, but maybe getting it at a cheaper level with an income component.” She also finds the energy sector within the space compelling since she believes the demand for oil will remain strong. Investors looking to get in on the action should turn to a well diversified high-yield muni fund, she said. The Nuveen High Yield Municipal Bond Fund (NHMRX) currently has a 5.48 30-day SEC yield and an expense ratio of 1.8%. NHMAX YTD mountain Nuveen High Yield Municipal Bond Fund year to date Solid yields and an inflation hedge Another favorite income play of Malik’s is bank loans . The underlying assets are debt instruments issued by well-known companies that are considered below investment grade. They are structured and syndicated by banks to large groups of lenders and typically have floating interest rates tied to the secured overnight financing rate (SOFR). That floating rate helps investors navigate the uncertainty around inflation — and whether the Middle East conflict could lead to a significant, one-time bump or whether there will ultimately be structural inflation, she said. “We probably are getting a slower pace of Fed rate cuts than we originally expected. That’s positive for floating rate loans, and they offer an attractive yield,” Malik said, noting that loans up to three years yield about 8%. The assets are also a good portfolio diversifier because of their low correlation to other asset classes, including even investment-grade bonds. While bank loans aren’t easily accessed by retail investors, there are a number of mutual and exchange-traded funds that hold them. Within the Nuveen Floating Rate Income Fund (NFRAX) , senior loans make up 82.8% of the assets. The fund has a 30-day SEC yield of 5.94% and a 1% expense ratio. NFRAX YTD mountain Nuveen Floating Rate Income Fund year to date Lastly, Malik likes preferred securities , which have characteristics of both equities and fixed income. They trade on exchanges like stocks but also have par values and pay a stream of income like bonds. In addition, when the price of a preferred goes down, the yields rise. The securities are seeing yields above 6%. The income may also have a tax advantage over bond yields, since it is generally treated as a qualified dividend and subject to a rate of 0%, 15% or 20%. Bond interest, on the other hand, is taxed as ordinary income, which goes up to a rate of 37%. The market is heavily dominated by financial companies, which Malik prefers thanks to lower regulations, strong fundamentals and higher liquidity.
