Investors can snap up yields near 10-year highs in this high-quality, tax-free play, says Nuveen

CNBC

10-07-2025

Investors looking for a great entry point in municipal bonds can find it in water revenue issues, according to Nuveen. The muni market, in general, has been the worst-performing fixed-income asset class so far this year through the second quarter, said Dan Close, head of municipals at Nuveen. That has created a unique opportunity to nab the bonds at bargain prices — with yields that are approaching 10-year highs, he said. Yields move inversely to prices, so the market's recent weakness equates to higher yields. For instance, an AA-rated water revenue bond from New York City Water Finance Authority that has a 4.75% tax free yield equals a taxable equivalent yield of about 10.6% for residents in the highest tax bracket, Close said. Water revenue bonds are primarily AA-rated obligations, he noted. They generally finance projects related to water infrastructure like water treatment plants and pipelines. "You're approaching equity-like returns for what some would argue is the safest sector in municipals," Close said in an interview with CNBC. "This sector, historically, has had one of the lowest default instances in the municipal space." As essential service monopoly bonds, they are minimally affected by tariffs and economic slowdowns, he added. "If these essential service monopolies that are super low defaults are going in and producing these outsized yields, now might be an opportunity to take a look at water and sewer and, by extension, the entire municipal asset class," he said. FLAAX YTD mountain Nuveen All-American Municipal Bond Fund in 2025. Nuveen's All American Municipal Bond Fund holds water revenue munis, including those issued by the Great Lakes Water Authority. A-shares of the fund have a 30-day SEC yield of 4.07% and a 0.76% gross expense ratio. The Nuveen Intermediate Duration Municipal Bond Fund also holds water revenue bonds from issuers such as Honolulu City and County. The fund's A-shares have a 3.11% 30-day SEC yield and a 0.65% gross expense ratio. $1.2 trillion investment needed The country's deteriorating infrastructure and the remediation of " forever chemicals" such as perfluoroalkyl and polyfluoroalkyl , or PFAS, from drinking water are going to drive bond issuance in the sector, Close said. "Aging systems can pose serious public safety risks, from frequent water main breaks to lead contamination and waterborne disease," he wrote in a recent note . Some $1.2 trillion in investments over the next 20 years are needed to address these infrastructure concerns, according to reports from the Environmental Protection Agency . On top of that, remediation of PFAS from drinking water needs to be funded, Close told CNBC. PFAS comes from products like nonstick cookware or certain food packaging and don't easily break down in the environment or, if ingested, in bodies. "It's going to impact 15% of utilities in the United States," he said. "This alone to remediate this new risk is going to cost between $40 and $90 billion." The EPA finalized rules last year requiring utilities to reduce exposure to PFAS in drinking water. But last month the agency said it will weaken limits on some of the chemicals. Shorter term, a less-aggressive EPA may make the metrics look better for utilities as future capital plans get pushed out, Close noted. "[However], you have to continue to invest in your infrastructure in order to be able to meet the growing needs of delivering water and sewer [services] to the average household," he said. Meanwhile, water scarcity is a challenge in the West and Southwest, Close said. That means investments in projects to recycle, desalinate and conserve water, he noted. For instance, the Southern California Metropolitan Water District has been facing supply constraints thanks to ongoing droughts, he pointed out. It plans to build a multi-billion dollar water recycling plant , along with its partner the Los Angeles County Sanitation Districts. It has already accumulated $1.6 billion in funds and plans to finance the remaining amount with grants, internal funds and municipal bond issuance, Close said. Finding opportunities When choosing water revenue bonds, Close considers a number of factors, including issuer's financial liquidity, which he measures by the cash it has on hand. He also looks at how much debt the issuer has, as well the affordability of its services — the water rates versus the demographic profile of the population. In addition, he looks at projected capital plans. For instance, whether the issuer is subject to future PFAS remediation. "If you are, you might have to go in and take on enough debt that you might have some stress on your current credit ratings," he said. However, for an investor who does his homework, the rewards are there, he said.