The recent decision by the Federal Reserve to increase interest rates has opened up a distinct chance for investors in municipal bonds. While the widely held iShares National Muni Bond ETF (MUB) maintains its position as a reliable investment foundation, a quartet of leveraged national municipal closed-end funds, encompassing Nuveen Municipal Credit Income Fund (NZF), Nuveen AMT-Free Municipal Credit Income Fund (NVG), Nuveen AMT-Free Quality Municipal Income Fund (NEA), and BlackRock MuniYield Quality Fund III (MYI), experienced notable declines. These funds now present tax-exempt distribution yields around or exceeding 8%, and their current trading prices are below their Net Asset Value (NAV). This scenario offers a potentially more advantageous investment for individuals seeking enhanced tax-free earnings, particularly within taxable portfolios.
For many years, the iShares National Muni Bond ETF (MUB) has been a go-to for investors seeking tax-free income. Its minimal expense ratio of 0.05% and unleveraged structure typically shield investors from sharp downturns when interest rates climb. However, the recent September 17, 2026, Federal Reserve rate hike, pushing the target range upper bound to 4.00% and the 10-year Treasury to 4.96%, significantly impacted leveraged municipal closed-end funds. These funds, unlike MUB, utilize leverage, making them more susceptible to interest rate fluctuations. The consequent sell-off has led to their tax-free distribution yields reaching or surpassing 8%, coupled with trading at a discount to their NAV.
For investors primarily focused on maximizing monthly income in taxable accounts, the yield offered by MUB often lags behind that of its leveraged closed-end counterparts. This article highlights four such alternatives: three from Nuveen and one from BlackRock. All these funds offer monthly payouts and are currently trading below their NAV, a direct result of the September market adjustments. These specific funds include Nuveen Municipal Credit Income Fund (NZF), Nuveen AMT-Free Municipal Credit Income Fund (NVG), Nuveen AMT-Free Quality Municipal Income Fund (NEA), and BlackRock MuniYield Quality Fund III (MYI).
The market witnessed a synchronous decline across these four funds following the rate adjustment. Nuveen Municipal Credit Income Fund (NZF) saw a 7.3% decrease, Nuveen AMT-Free Municipal Credit Income Fund (NVG) fell by 7.26%, Nuveen AMT-Free Quality Municipal Income Fund (NEA) dropped 8.79%, and BlackRock MuniYield Quality Fund III (MYI) declined by 7.99%. As of September 22, CEFConnect data showed NZF with the highest cash yield at 8.49% on market price and 8.22% on NAV, driven by its 41.93% effective leverage. For an investor in the 32% federal tax bracket, this 8.49% tax-exempt yield is equivalent to a taxable yield of approximately 12.5%.
Historical data further supports the appeal of NZF, with its 12-month total return on NAV at 7.75%, outperforming NVG, NEA, and MYI. Additionally, NZF's average earnings per share adequately cover its annualized distribution, indicating a sustainable income stream. While NVG serves as an AMT-safe option with a comparable yield for those affected by the alternative minimum tax, MYI presents a deep-discount opportunity at -8.76%, though with a lower distribution rate on NAV. It's important to note that payouts are not static, as demonstrated by NEA's adjustment in September 2025.
The elevated yields of these leveraged funds come with associated risks. Their substantial effective leverage, typically ranging from 41% to 43%, and all-in expense ratios exceeding 3% (including leverage interest), contrast sharply with MUB's 0.05% expense ratio. During periods of rising short-term rates, as seen in 2022, these leveraged funds experienced significant NAV and market-price losses. A sustained tightening cycle could lead to similar outcomes. Therefore, a strategic approach might involve reallocating a portion of MUB holdings, perhaps a quarter to a third, into NZF (or NVG for AMT-sensitive investors) to capture higher income without drastically increasing rate sensitivity. This strategy is particularly tax-efficient for taxable accounts, especially after recent sell-offs that may have brought many MUB holders close to their cost basis, minimizing capital gains friction.
The core principle for stability remains MUB. However, for investors whose primary objective with municipal bonds is monthly income, the recent market adjustments have made 8%-plus tax-free yields available through funds like NZF and NVG at more attractive prices than they were just a month prior. Continuous monitoring of the discount to NAV on platforms like CEFConnect is advisable, and investors should be prepared to reassess their positions if these funds revert to trading at a premium or if distribution declarations decrease. Until then, the significant yield differential presents a compelling argument for a partial portfolio adjustment.
