There's a corner of the municipal bond market that is tied to something on many American's minds right now: holiday shopping. Sales-tax revenue bonds are secured, as the name suggests, by levies generated by sales and they are used to fund essential infrastructure, said Daniel Close, head of municipals at Nuveen. "While tariff-driven price increases create uncertainty about consumer behavior this year, sales tax bonds feature strong security provisions and reserves that have proven resilient through economic cycles," he wrote in a recent note. The bonds may have yields that are generally higher than other munis, Close said in an interview with CNBC. For instance, New York State sales tax bonds compared to the state's general obligation bonds can provide approximately 0.12 to 0.35 percentage points of additional yield from the short end of the curve to the long end, he noted. "They're usually very highly rated," he said. "The reason why we like sales-tax bonds so much [is] there's usually a very long history of the collections." Nuveen's funds hold a number of sales-tax bonds, like the NY Dorm Authority State Sales Tax bond, which is rated AA+ by S & P, in the Nuveen Intermediate Duration Municipal Bond Fund . The Denver Convention Center Hotel bond, which yields 3.76% and is rated BBB-, is in both the Nuveen All American Municipal Bond Fund and the Nuveen Intermediate Duration Municipal Bond Fund. NMBAX YTD mountain Nuveen Intermediate Duration Municipal Bond Fund A-shares year to date A small slice of the market Sales tax and excise bonds make up about 6.4% of the muni market, Close said. Some 45 states collect sales tax, with local taxes in 38 states, he noted. It's the second largest source of revenue for states after personal income tax, yet the tax rates and the taxability of items vary, he said. Sales tax collections are expected to increase 3.4% in 2025, which is a drop off from the 4.6% growth in 2024, according to Nuveen. While the fourth quarter will see some softness in the economy, which should impact tax collections, it won't lead to credit downgrades because of how the bonds are structured and are generally very over-collateralized versus the revenue streams, Close said. In other words, while the assets are a bit more economically sensitive than income and property tax munis, they aren't necessarily riskier, he explained. "It just means that you need to make sure that you have plenty of cushion, if you will, from the coverage in order to make sure they continue to pay," he said. To be sure, investors should do their homework. While most are rated AA and have long operating histories, not all bonds are highly rated, he said. Close considers how long the revenue source has been in place, as well as its performance history – particularly during difficult times like Covid and the global financial crisis. In addition, he looks at the bonds debt service coverage, which measures the bond issuer's ability to pay its debts. The broadness of the sales tax also matters, Close said. Some jurisdictions may not tax groceries or clothing items, for instance, he pointed out. "If you have a very narrow stream, you have a much greater opportunity for disruption given that that narrow stream," Close said. "So we're looking for broad tax bases."
