Muni Mayhem: Is NMZ's Pain Your Gain?

The Nuveen Municipal High Income Opportunity Fund (NMZ) has been in the spotlight lately after reporting a $36.9 million net loss for the six months ending April 30, 2025. But here's the kicker: this fund isn't backing down. It's still paying out a 6.73% annualized distribution and trading at a slight discount to its net asset value (NAV). Is this a sign of weakness—or a once-in-a-cycle buying opportunity? Let's dive in.

The Leverage Double-Edged Sword

NMZ isn't your average muni bond fund. It's designed to amplify returns using 38.59% leverage, borrowing money to buy more bonds and boost income. That strategy works wonders when yields are rising and defaults stay low—but it's a disaster in a falling market.

In 2025, rising interest rates and credit jitters have hit lower-rated municipal bonds hard. NMZ's portfolio holds up to 75% in bonds rated Baa/BBB or lower, including riskier issuers like Puerto Rico's Sales Tax Financing Corporation. The math is simple: leverage turns small price declines into big losses. Yet the fund's NAV still outperformed its benchmark, the Bloomberg Municipal Bond Index (^BBMBTR), by 0.24% in Q2 2025.

Distributions: A Signal of Strength or Hubris?

Despite the half-year loss, NMZ hiked its monthly distribution to $0.0665 per share in June 2025—a 1.5% increase from 2024 levels. This move isn't reckless if you consider its 14.58% 12-month total return (as of August 2024). But here's the catch: nearly 2.6% of its distributions in 2024 came from returns of capital, not income.

The fund's 3.75% expense ratio—including a hefty 2.59% in interest costs—adds to the pressure. If yields stay high, NMZ's borrowing costs could eat into returns. But if rates stabilize, its high-yield strategy could rebound.

The Contrarian Play: NAV Discounts and Bargain Bonds

On June 30, 2025, NMZ traded at a -0.94% discount to its NAV of $10.41. That's a steal compared to its one-year average discount of -7.30%. The broader muni market is also undervalued: the average yield on high-yield municipal bonds is now 4.8%, up from 3.2% in 2023.

This creates a sweet spot for contrarians: buying shares at a discount while the fund's underlying bonds recover. But there's a catch—Puerto Rico and Florida bonds, which make up nearly 15% of NMZ's portfolio, face economic headwinds.

Risks to Consider

• Credit Risk: Puerto Rico's debt restructuring and Florida's housing market slowdown could trigger defaults.
• Interest Rate Sensitivity: Rising rates hurt long-dated bonds, and NMZ's average maturity is 18.5 years.
• Leverage Costs: If borrowing rates climb further, NMZ's expense ratio could balloon.

The Bottom Line: A High-Risk, High-Return Gamble

NMZ is a love-it-or-hate-it fund. Its leverage and junk-muni focus make it volatile, but the current discount and high yields offer a compelling entry point—if you're willing to stomach credit risk.

Action to Take:
- Buy NMZ if you're comfortable with muni bond volatility and have a 3–5-year horizon.
- Avoid it if you can't handle a potential NAV drop or defaults in its top holdings.

This isn't a “set it and forget it” investment. Keep a close eye on NMZ's 19(a) notices for distribution sourcing updates and track the Bloomberg Municipal Bond Index for market direction.

In the muni bond arena, sometimes the smell of smoke signals a fire—and an opportunity to profit from others' panic. NMZ's loss could be your gain. Just don't forget to keep a fire extinguisher handy.