Nomura Tax-Free USA Intermediate Fund delivered a total return of 2.51% during the second quarter of 2026, outperforming its benchmark index by 37 basis points. The fund's strategy focused on intermediate-duration municipal bonds, capitalizing on a favorable shift in the fixed income landscape as interest rates declined through the quarter.
The municipal bond market experienced substantial inflows during Q2 2026, driven by investors seeking tax-exempt income in higher tax brackets. The fund benefited from duration positioning as longer-dated bonds rallied following softer economic data and dovish signals from the Federal Reserve. Nomura's portfolio managers maintained an overweight position in higher-quality issuers while selectively adding exposure to select lower-rated securities offering attractive yield premiums.
Key drivers of performance included a 15 basis point decline in 10-year municipal bond yields, which compressed credit spreads across most sectors. The fund's intermediate duration positioning, with an average maturity around 6 years, proved advantageous compared to shorter-duration alternatives. Municipal bond supply remained manageable through the quarter, supporting valuations across the sector.
Sector allocation reflected a defensive posture, with the fund maintaining overweights in essential services and general obligation bonds while underweighting higher-volatility sectors like healthcare and housing. The portfolio benefited from selective positioning in corporate-backed municipal bonds, particularly in utility and infrastructure projects offering stable cash flows.
Looking forward, portfolio managers expect continued volatility in broader fixed income markets tied to Federal Reserve policy expectations. The fund maintains a cautious stance on municipal bond valuations, which have compressed significantly on a historical basis. However, sustained demand for tax-exempt income and potential changes to federal tax policy could support municipal bonds through late 2026.
The fund's expense ratio of 0.32% remains competitive within the municipal bond fund category. Net assets stood at $847 million at quarter-end, with a current yield on the fund's distribution around 3.2%, providing consistent tax-advantaged income for investors in higher tax brackets.