NUM Nuveen Michigan Quality Municipal Income Fund

 

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Table of Contents

 

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Table of Contents

Chair’s Letter
to Shareholders

Dear Shareholders,

The COVID-19 crisis is taking an unprecedented toll on our health, societies, economies and financial markets. Our thoughts are with all whose lives have been affected by the disease and its economic fallout. The extreme “social distancing” efforts needed to contain the coronavirus are causing a severe contraction in economic activity and amplifying market volatility, as global supply chains and consumer and business demand remain significantly disrupted. However, the full economic impact remains to be seen. The number of confirmed cases is still accelerating in the U.S. and other parts of the world, and previous epidemics offer few parallels to today’s situation. The spike in market volatility during March reflected great uncertainty, and while conditions have stabilized to some degree, we expect that large swings in both directions are likely to continue until there is more clarity.

While we do not want to understate the dampening effect on the global economy, differentiating short-term interruptions from the longer-lasting implications to the economy may provide opportunities. Some areas of the global economy were already on the mend prior to the coron-avirus epidemic. Momentum could pick up again as factories come back online and consumer demand resumes once the virus is under control and temporary bans on movement and travel are lifted. Central banks and governments around the world have announced economic stimulus measures. In the U.S., the Federal Reserve has cut its benchmark interest rate to near zero and introduced programs that helped revive the U.S. economy after the 2008 financial crisis. The U.S. government has approved three relief packages, including a $2 trillion-dollar package directly supporting businesses and individuals. The Coronavirus Aid, Relief and Economic Security Act, called the CARES Act, provides direct payments and expanded unemployment benefits to individuals, loans and grants to small businesses, loans and other money to large corporations and funding for hospitals, public health, education and state and local governments. Additional aid will likely be approved in the months ahead.

In the meantime, patience and a long-term perspective are key for investors. When market fluctuations are the leading headlines day after day, it’s tempting to “do something.” However, your long-term goals can’t be met with short-term thinking. We encourage you to talk to your financial advisor, who can review your time horizon, risk tolerance and investment goals. On behalf of the other members of the Nuveen Fund Board, we look forward to continuing to earn your trust in the months and years ahead.

Sincerely,

Terence J. Toth
Chair of the Board
April 22, 2020

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Portfolio Managers’ Comments


Nuveen Arizona Quality Municipal Income Fund (NAZ)
Nuveen Michigan Quality Municipal Income Fund (NUM)
Nuveen Ohio Quality Municipal Income Fund (NUO)

These Funds feature portfolio management by Nuveen Asset Management, LLC (NAM), an affiliate of Nuveen Fund Advisors, LLC, the Funds’ investment adviser. Portfolio managers Michael S. Hamilton and Daniel J. Close, CFA, review U.S. economic and municipal market conditions, key investment strategies and the twelve-month reporting period performance of these three Nuveen Funds. Michael assumed portfolio management responsibility for NAZ in 2011, while Dan has managed NUM and NUO since 2007.

What factors affected the U.S. economy and the national municipal bond market during the twelve-month reporting period ended February 29, 2020?

The longest economic expansion in U.S. history came to an abrupt halt in early 2020 amid the coronavirus pandemic. With large portions of the economy shut down, companies closing either temporarily or permanently, and nearly half of the U.S. population asked to stay home (as of March 2020, subsequent to the close of this reporting period), the economy is expected to show a deep contraction in the first quarter of 2020 and a dramatic increase in unemployment in the coming months.

In this twelve-month reporting period, however, the coronavirus had not yet had an impact on domestic economic indicators. Overall, economic growth remained steady over this reporting period. In the fourth quarter of 2019, gross domestic product (GDP) grew at an annualized rate of 2.1%, according to the “second” estimate by the Bureau of Economic Analysis. GDP measures the value of goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes. In the final months of the year, the economy was boosted by moderate consumer spending, along with positive contributions from government spending and trade, which offset weakness in business investment. For 2019 as a whole, U.S. GDP grew 2.3%, a decline from 2.9% in 2018 and the slowest pace since 2016.

Consumer spending, the largest driver of the economy, remained well supported in this reporting period by low unemployment, wage gains and tax cuts. As reported by the Bureau of Labor Statistics, the unemployment rate fell to 3.5% in February 2020 from 3.8% in February 2019 and job gains averaged around 194,000 per month for the past twelve months. As the jobs market has tightened, average hourly earnings grew at an annualized rate of 3.0% in February 2020. However, inflation remained subdued.

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This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.

Certain statements in this report are forward-looking statements. Discussions of specific investments are for illustration only and are not intended as recommendations of individual investments. The forward-looking statements and other views expressed herein are those of the portfolio managers as of the date of this report. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and the views expressed herein are subject to change at any time, due to numerous market and other factors. The Funds disclaim any obligation to update publicly or revise any forward-looking statements or views expressed herein.

For financial reporting purposes, the ratings disclosed are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group (S&P), Moody’s Investors Service, Inc. (Moody’s) or Fitch, Inc. (Fitch). This treatment of split-rated securities may differ from that used for other purposes, such as for Fund investment policies. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings, while BB, B, CCC, CC, C and D are below investment grade ratings. Holdings designated N/R are not rated by these national rating agencies.

Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. Insurance relates specifically to the bonds in the portfolio and not to the share prices of a Fund. No representation is made as to the insurers’ ability to meet their commitments.

Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this section.

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Portfolio Managers’ Comments (continued)

The Bureau of Labor Statistics said the Consumer Price Index (CPI) increased 2.3% over the twelve-month reporting period ended February 29, 2020 before seasonal adjustment.

Low mortgage rates and low inventory drove home prices moderately higher in this reporting period. The S&P CoreLogic Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, was up 3.9% year-over-year in January 2020 (most recent data available at the time this report was prepared). The 10-City and 20-City Composites reported year-over-year increases of 2.6% and 3.1%, respectively.

As data pointed to slower momentum in the overall economy, the U.S. Federal Reserve (Fed) left rates unchanged throughout the first half of 2019 then cut rates by 0.25% at each of the July 2019, September 2019 and October 2019 policy committee meetings. Markets registered disappointment with the Fed’s explanation that the rate cuts were a “mid-cycle adjustment,” rather than a prolonged easing period, and its signal that there would be no additional rate cuts in 2019. Also in the latter half of 2019, the Fed announced it would stop shrinking its bond portfolio sooner than scheduled, as well as began buying short-term Treasury bills to help money markets operate smoothly and maintain short-term borrowing rates at low levels. Fed Chairman Powell emphasized that the Treasury bill purchases were not a form of quantitative easing. The Fed continued its Treasury bill buying in January 2020, as well as left its benchmark interest rate unchanged, while noting the emerging coronavirus risks. (Subsequent to the end of this reporting period, and in response to the COVID-19 outbreak, the Fed enacted an array of emergency measures to stabilize the financial system and support the markets, including cutting its main interest rate to near zero, offering lending programs to aid small and large companies and allowing unlimited bond purchases, known as quantitative easing. Meanwhile, the U.S. government approved three aid packages, totaling more than $100 billion in funding to health agencies and employers offering paid leave and $2 trillion in direct payments to Americans, an expansion of unemployment insurance and loans to large and small businesses.)

While trade and tariff policy drove market sentiment for most of the twelve-month reporting period, the outbreak of the novel coron-avirus and its associated disease COVID-19 rapidly dwarfed all other market concerns as the reporting period was closing. Equity and commodity markets sold-off and safe-haven assets rallied as China and other countries initiated quarantines, restricted travel and shuttered factories and businesses. The potential economic shock was particularly difficult to assess, which amplified market volatility.

Prior to the virus outbreak, markets had become more bullish on the outlook for 2020 as trade policy and Brexit appeared to make progress at the end of 2019. The U.S. and China agreed on a partial trade deal, which included rolling back some tariffs, increasing China’s purchases of U.S. agriculture products and the consideration of intellectual property, technology and financial services rights. The “phase one” deal was signed on January 15, 2020. While much of the focus remained on the U.S.-China relationship, trade spats between the U.S. and Mexico, the European Union (EU), Brazil and Argentina also arose throughout the reporting period. In January 2020, the U.S. Congress fully approved the U.S., Mexico and Canada Agreement (USMCA), which replaces the North American Free Trade Agreement. With more clarity on trade deals, the trade-related deterioration in global manufacturing and export data was expected to improve. However, the COVID-19 outbreak has since upended those assumptions.

The U.K. officially left the EU on January 31, 2020. After former Prime Minister Theresa May was unable to secure a Brexit deal by the original March 29, 2019 deadline, she resigned as of June 7, 2019. When her successor, Boris Johnson, failed to meet the EU’s first deadline extension of October 31, 2019, the EU approved a “flextension” to January 31, 2020. The Conservative Party won a large majority in the December 2019 general election and Parliament passed the Brexit Bill days later, facilitating the U.K.’s exit at the end of January 2020. Britain must now redefine its relationship with the EU during the 11-month transition period.

Investors also remained watchful of local political dynamics around the world. In Italy, the prime minister unexpectedly resigned in August 2019, and the newly formed coalition government appeared to take a less antagonistic stance. Europe’s traditional centrist parties lost seats in the May 2019 Parliamentary elections and populist parties saw marginal gains. Europe also contended with the “yellow vest” protests in France, immigration policy concerns, Russian sanctions and political risk in Turkey. Anti-government protests erupted across Latin America, Hong Kong and Lebanon during 2019. Venezuela’s economic and political crisis deepened. Argentina

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surprised the market with the return of a less market-friendly administration. Brazil’s Bolsonaro administration achieved a legislative win on pension reform and kept the economy on a path of modest growth. The ruling parties in India and South Africa maintained their majorities, where slower economic growth could complicate their respective reform mandates.

Municipal bonds delivered strong performance over the twelve-month reporting period. The significant decline in interest rates was the main driver of higher municipal bond prices, with positive technical and fundamental conditions also supporting credit spread tightening. Signs that the economy’s momentum was slowing, a more dovish central bank policy, geopolitical tensions (especially regarding trade) and bouts of equity market volatility drove interest rates considerably lower over the reporting period. The U.S. Treasury market began pricing coronavirus risk toward the very end of the reporting period, with a steep fall in yields, but the municipal market registered a relatively smaller move at the time. The U.S. Treasury yield curve flattened overall, with a portion of the curve temporarily inverting from late August 2019 to late September 2019. The municipal yield curve also flattened overall, as yields on longer maturities fell more than those of shorter maturities. Despite concerns about the broader economic outlook, credit conditions remained favorable for municipal credits. State tax revenues have increased across the 50 states and a healthy housing market added to local government tax revenues. Defaults in 2019 were mainly confined to idiosyncratic situations.

Municipal bond gross issuance nationwide remained robust in this reporting period. The overall low level of interest rates encouraged issuers to continue to actively refund their outstanding debt. In these transactions the issuers are issuing new bonds and taking the bond proceeds and redeeming (calling) old bonds. These refunding transactions have ranged from 30% to 60% of total issuance over the past few years. Thus, the net issuance (all bonds issued less bonds redeemed) is actually much lower than the gross issuance. So, while gross issuance volume has been adequate, the net has not and this was an overall positive technical factor on municipal bond investment performance in recent years. Notably, taxable municipal bond issuance increased meaningfully in 2019. The Tax Cut and Jobs Act of 2017 prohibits municipal issuers from issuing new tax-exempt bonds to pre-refund existing tax-exempt bonds. However, municipalities have taken advantage of the low interest rate environment and the strong demand for yield to issue taxable municipal debt, enabling them to save on net interest costs.

Demand for municipal bonds was robust in this reporting period, with consistently positive cash flows into municipal bond funds in calendar year 2019 and the first two months of 2020. (Fund flows turned more volatile after the close of the reporting period as markets began to assess the coronavirus impact.) Low interest rates in the U.S. and globally have continued to drive investors toward higher after-tax yielding assets, including U.S. municipal bonds. Additionally, as tax payers have begun to assess the impact of the 2017 tax law, which caps the state and local tax (SALT) deduction for individuals, there has been increased demand for tax-exempt municipal bonds in 2019 to date, especially in states with high income and/or property taxes.

How were the economic and market environments in Arizona, Michigan and Ohio during the twelve-month reporting period ended February 29, 2020?

Arizona’s economy continues to grow steadily since the recession of 2008 and the collapse of the housing market. The state’s job growth exceeded the nation’s for 2019, driven by construction, financial activities, education and health care, and leisure and hospitality. Arizona’s favorable business environment and ample workforce has lured new businesses into the state, recently including financial and insurance institutions such as USAA and State Farm. The economy’s improvement continues to favorably impact the housing market. Gains in Arizona housing prices have been driven primarily by the Phoenix market, with the state’s smaller metropolitan areas also showing progress. According to the S&P CoreLogic Case-Shiller Index, housing prices in Phoenix rose 6.9% over the twelve months ended January 2020 (most recent data available at the time this report was prepared), compared with a 3.9% price increase nationally. In the job market, the Arizona unemployment rate was 4.5% as of February 2020 versus 3.5% for the nation. Governor Ducey enacted the state’s $11.85 billion general fund Fiscal Year 2020 budget, up 14.1% over the previously enacted budget. The budget includes depositing $542 million into the rainy day fund, additional money for K-12 education, including a teacher salary increase, and increased funding for public safety and drought contingency plans without raising taxes. The

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Portfolio Managers’ Comments (continued)

recovering economy has helped the state replenish its rainy day fund, growing it to $1 billion after it was almost depleted in Fiscal Year 2009. For the state of Arizona, its Biennial Fiscal Year end is June 30, 2020. Due to the COVID-19 crisis, the state’s budget will be impacted to a varying degree as tax receipts are reduced and the expense to fight the virus increases. Moody’s upgraded the state’s Issuer Credit Rating (ICR) on November 19, 2019, from Aa2 to Aa1, citing “the state’s continued economic growth, the rebuilding of its reserves and the reduction to its already low debt burden.” As of February 2020, S&P and Moody’s rated Arizona’s ICR at AA and Aa1, respectively, with a stable outlook.

Michigan’s economic growth has outpaced many of its Great Lakes region neighbors in recent years, driven by employment growth and continued economic diversification. To a large extent, the Michigan economy remains tied to events in the auto industry, as the “Big Three” (General Motors, Ford and Chrysler) continued to rank among the state’s five largest employers. However, auto manufacturing is not expected to be a driver of growth for Michigan in the near term. Light motor vehicle sales were essentially flat in calendar year 2019, while sales forecasts show stable to slight declines annually through 2022. Overall, Michigan remains heavily reliant on manufacturing, which represented 14.2% of employment in the state, compared with 8.5% nationally in 2019. As of February 2020, Michigan’s unemployment rate was just 3.6%. Favorably, the state’s labor force participation rate has remained stable as unemployment has improved, indicating a real improvement in job growth. Following the peak in housing prices in mid-2006, home prices in Michigan declined dramatically and the inventory of foreclosed homes remained elevated in many of the state’s hardest-hit metropolitan areas, including Detroit, Warren and Flint. Improvement in the state economy has brought slow, steady improvement in the housing market. According to the S&P CoreLogic Case-Shiller Index of 20 major metropolitan areas, housing prices in Detroit rose 3.5% over the twelve months ended January 2020 (most recent data available at the time this report was prepared), compared with a 3.9% price increase nationally. On the fiscal front, as revenues improved, the state has demonstrated a commitment to rebuilding reserves and maintaining structurally balanced operations. The state’s previously depleted budget stabilization/rainy day reserve fund was on pace to exceed $1 billion by the end of Fiscal Year 2019, equal to over 4.5% of combined operating revenues. The state’s improved financial and cash position has eliminated the need for cash flow borrowing, which the state hasn’t resorted to since 2011. Strong income and sales tax revenue growth have helped make this possible, though the pace of revenue growth is projected to slow over the next two years. This slowdown and the state’s gap in infrastructure spending have the potential to pose future budgetary pressure. Michigan’s Fiscal Year 2020 budget increased spending by 3% over the prior year to $58.9 billion. Unable to secure legislative support for a transportation infrastructure improvement plan funded by a gas tax increase, Governor Whitmer announced a plan to instead borrow up to $3.5 billion to fix state roads. The state of Michigan and its local governments will be challenged fiscally in its response to the coronavirus outbreak, and the economy is expected to slow as a result of mandatory closures due to the virus. The size of the impact will depend on the speed of the containment and if the state costs are reimbursed by the federal government. The state has a history of proactively managing its budget. Strong management combined with the state’s solid financial position provides some financial flexibility as the situation evolves. For the state of Michigan, its Fiscal Year end is September 30, 2020. Due to the COVID-19 crisis, the state’s budget will be impacted to a varying degree as tax receipts are reduced and the expense to fight the virus increases. As of February 2020, Moody’s and S&P rated Michigan general obligation (GO) debt at Aa1 and AA-, respectively.

Ohio is trailing the nation in terms of job growth but is besting most of its Midwest peers. Ohio’s job growth in 2019 was an under-whelming 0.5% from a year ago because of losses in manufacturing. The state’s unemployment rate was 4.1% for February 2020, compared to 3.5% for the nation. Ohio’s gross domestic product was $676 billion in 2018, making Ohio the seventh largest state economy. Ohio ranks fourth among the 50 states in manufacturing gross domestic product. The COVID-19 outbreak in early 2020 is affecting Ohio’s steel and auto manufacturers because of global supply and demand disruptions. On the flip side, Ohio’s health care industry is booming and accounted for more than one-third of all net new jobs in 2019. Health care providers are continuing to invest and expand in the state’s largest metro areas. Ohio’s economy has also been affected by stagnant population growth. The state’s population grew by 174,000 to nearly 11.7 million between 2008 and 2018, placing the state’s lackluster growth at 41st in the nation. According to the S&P CoreLogic Case-Shiller Index, housing prices in Cleveland rose 3.9% over the twelve months ended January 2020 (most recent data available at the time this report was prepared), in line with the 3.9% price increase nationally. Ohio’s median household income continues to widen from the national median. Ohio’s median household income stood at $54,021, which

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places it 35th in the U.S., according to the Census Bureau. Ohio operates on a biennial budget cycle. The $69 billion, two-year spending plan for Fiscal Years 2020 and 2021 includes a 4% reduction in personal income tax rates. In the transportation budget, the state increased the gas tax 10.5 cents, bringing it to 38.5 cents per gallon, which will be directed toward transportation infrastructure spending. On the fiscal front, total tax receipts in the state’s general fund are up 3.1% over the prior year, through February 2020. Disbursements from the general fund are 0.9% below estimate for the same year-to-date period. The state’s conservative fiscal management has resulted in a strong financial position, with sound liquidity and reserve levels. Ohio prioritized the rebuilding of its budget stabilization fund after the Great Recession. The current budget stabilization fund balance of $2.7 billion is 8.5% of general fund revenues. For the state of Ohio, its Biennial Fiscal Year end is June 30, 2020. Due to the COVID-19 crisis, the state’s budget will be impacted to a varying degree as tax receipts are reduced and the expense to fight the virus increases. As of February 2020, Moody’s and S&P rated Ohio GO debt at Aa1 and AA+, respectively, with stable outlooks.

What key strategies were used to manage these Funds during the twelve-month reporting period ended February 29, 2020?

Each Fund seeks to provide current income exempt from both regular federal and designated state income taxes by investing primarily in a portfolio of municipal obligations issued by state and local government authorities within a single state or certain U.S. territories. Under normal market conditions, each Fund invests at least 80% of the sum of its net assets and the amount of any borrowings for investment purposes in municipal bonds that pay interest that is exempt from regular federal personal income tax and a single state’s personal income tax. Each Fund may invest up to 20% in municipal securities that are exempt from regular federal income tax, but not from that single state’s income tax if, in NAM’s judgement, such purchases are expected to enhance the Fund’s after-tax total return potential. To the extent that the Funds invest in bonds of municipal issuers located in other states, each Fund may have income that is not exempt from state personal income tax.

Municipal bonds performed well in this reporting period as valuations benefited from the falling interest rate environment and favorable technical supply-demand conditions. The municipal bond market experienced historically robust demand in the reporting period, particularly in high tax states such as California, New York and New Jersey, that exceeded the moderate pace of issuance. The new limits on state and local tax, or SALT, deductions resulted in larger than expected tax burdens for some high income taxpayers, driving demand for the tax benefits offered by municipal bonds. In this reporting period, Arizona’s municipal market underperformed the national market and Ohio’s market outperformed the national municipal market, while Michigan’s market performed nearly in line with the national market, as measured by their respective state S&P Municipal Bond Indexes.

We continued to take a bottom-up approach to discovering sectors that appeared undervalued as well as individual credits that we believed had the potential to perform well over the long term. Our trading activity continued to focus on pursuing the Funds’ investment objectives.

In the Arizona Fund, we bought primarily 15 year and longer maturities to help maintain the Fund’s duration band. We also tended to emphasize 4% coupon structures as the opportunity to buy attractive 5% coupon bonds dwindled. NAZ added positions across a range of sectors, including health care, charter schools, higher education and Puerto Rico sales tax bonds known as COFINAs. To fund our buying, we mainly used the proceeds from selling short bonds, e.g. bonds maturing in less than a year, pre-refunded bonds and bonds with shorter call structures.

In the Michigan Fund, we bought several long-dated higher education credits (Wayne State University, Western Michigan University and Ferris State University) and new issues for Trinity Health Care and Grand Rapids Sanitary Sewer, as well as added to the Fund’s COFINA exposure in the second half of the reporting period. We bought these bonds with the cash from called and maturing bonds.

In the Ohio Fund, purchases in the second half of the reporting period emphasized long maturities, including dedicated tax bonds offering 5% coupons, Ohio Water revenue bonds, a non-rated Port of Greater Cincinnati tax increment financing deal and Franklin County Hilton Hotel credits. Most of the new purchases were funded with the proceeds from called and maturing bonds, as well as the sale of pre-refunded and other short maturity, high quality bonds. Also during the second half of the reporting period, the state

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Portfolio Managers’ Comments (continued)

of Ohio refinanced its outstanding Buckeye Tobacco Settlement bonds. A large portion of the Fund’s Buckeye Tobacco exposure was called away, and we bought both long-dated 5% coupon structures and zero coupon structures of the replacement Buckeye Tobacco bonds.

Additionally, as explained in the August 31, 2019 semiannual report to shareholders, NUM and NUO each bought out-of-state issues in the first half of this reporting period, as we worked to embed a higher yield in the overall portfolios and move the Funds’ duration profiles closer to that of their benchmark indexes. We accomplished this by selling some shorter-dated, high quality (and lower yielding) in-state paper and using the proceeds to buy higher yielding out-of-state bonds.

As of February 29, 2020, NAZ, NUM and NUO continued to use inverse floating rate securities. We employ inverse floaters for a variety of reasons, including duration management, income enhancement and total return enhancement.

How did the Funds perform for the twelve-month reporting period ended February 29, 2020?

The tables in each Fund’s Performance Overview and Holding Summaries section of this report provide the Funds’ total returns for the one-year, five-year and ten-year periods ended February 29, 2020. Each Fund’s returns on common share net asset value (NAV) are compared with the performance of a corresponding market index.

For the twelve months ended February 29, 2020, the total returns on common share NAV for the three Funds outperformed their respective state’s S&P Municipal Bond Index and the national S&P Municipal Bond Index.

The factors driving performance in this reporting period included yield curve and duration positioning, credit ratings exposure and sector allocation. The substantial decline in interest rates helped longer duration bonds outperform over short duration bonds. NAZ and NUO benefited from their overweighted positioning in longer dated credits and underweights in short dated credits. NUM’s yield curve positioning, however, was a slight detractor from performance due to an underweight to 12-year and longer maturities, which were the best performing segment, and overweight to short maturities, which lagged. NUM’s holdings in the short maturity segment include bonds bought when prevailing interest rates were higher. While these bonds’ maturities have drifted lower over time as they approach their term dates, we have continued to hold them because of their higher embedded yields, which support the Fund’s income stream.

Our emphasis on lower rated, higher yielding bonds aided relative performance. Broadly speaking, the highest credit quality (AAA and AA rated) bonds underperformed in this reporting period, while lower rated bonds tended to outperform, due to strong investor demand for yield in an environment of low interest rates and a positive credit backdrop. On a relative performance basis, NAZ benefited from its underweights to high grade paper and overweights to bonds rated single A and lower, although the overall positive impact to relative performance was small. In NUM, an overweight to AAA rated bonds detracted from relative performance but the allocation to single B rated bonds (which are primarily tobacco settlement bonds) contributed positively. NUO’s credit ratings allocations were a drag on relative performance, mostly due to an overweight to AA rated credits, one of the weakest performing segments, and less exposure to non-rated bonds, which performed very well.

On a sector basis, the Arizona Fund’s underweight allocation to the tax supported sector was advantageous. Additionally, within the overall tax supported sector, NAZ held an overweight to incremental tax bonds, which further benefited performance. Another positive contributor was NAZ’s exposure to “other utilities” bonds, namely an overweight allocation to the strong performing Salt Verde Prepay Gas bonds. Although NAZ was overweight to outperforming sectors such as education and health care, our duration positioning within the sectors was unfavorable as the Fund held less exposure to longer duration bonds in these sectors. In aggregate, NAZ’s sector allocations contributed a marginal relative gain. In the Michigan Fund, an overweight to pre-refunded bonds detracted from relative performance, while the allocation to dedicated tax bonds added value. The Ohio Fund benefited from an overweight allocation to toll road credits and exposure to the industrial development revenue/pollution control revenue sector, which offset underperformance of its pre-refunded bonds allocation.

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The use of regulatory leverage was a factor affecting the Funds’ performance. Leverage is discussed in more detail later in the Fund Leverage section of this report.

An Update on COVID-19 Coronavirus and its Impact on the Securities Markets

The COVID-19 coronavirus pandemic has delivered a shock to the global economy. Containment efforts around the world have halted business and manufacturing operations and restricted people’s movement and travel. The disruptions to global supply chains, consumer demand, business investment and the global financial system are just beginning to be seen.

Although the detection of the virus in China was made public in December 2019, markets did not start to fully acknowledge the risks and potential economic impact until the latter portion of February 2020, when outbreaks outside of China were first reported. Global stock markets began to sell off severely, reaching a bear market (a 20% drop from the previous high) within three weeks, the fastest bear market decline in history. Even certain parts of the bond market suffered, below investment grade municipal and corporate bonds generally dropped the furthest, mostly out of concerns for the continued financial stability of lower quality issuers. Demand for safe-haven assets, along with mounting recession fears, drove the yield on the 10-year U.S. Treasury note below 1% in March 2020, an all-time low. Additionally, oil prices collapsed to an 18-year low on supply glut concerns, as shutdowns across the global economy sharply reduced oil demand while Saudi Arabia and Russia engaged in a price war.

Central banks and governments have responded with liquidity injections to ease the strain on financial systems and stimulus measures to buffer the shock to businesses and consumers. These measures have helped stabilize the markets over the short term, but volatility will likely remain elevated until the health crisis itself is under control (via fewer new cases, lower infection rates and/or verified treatments). There are still many unknowns and new information is incoming daily, compounding the difficulty of modeling outcomes for epidemiologists and economists alike.

After the end of the reporting period, the performance of each of the Funds in this report was negatively impacted by these events. Prices of municipal securities fell, which caused the leverage ratios of the Funds to increase markedly. After the U.S. Government took several actions to support the economy and the securities markets, those markets have largely normalized since the worst of the market dislocation in late March 2020, and bond prices have mostly recovered. However, it is possible that similar market dislocations will recur as the COVID-19 pandemic and society’s response to it plays out.

Additionally, the economic disruption caused by the COVID-19 pandemic is also very likely to negatively impact the state and local budgetary matters described earlier in the report, with states and localities being more likely to run budget deficits (or larger deficits) during the period of economic contraction stemming from the COVID-19 pandemic.

Nuveen, LLC and our portfolio management teams are monitoring the situation carefully and continuously refining our views and approaches to managing the Funds to best pursue investment objectives while mitigating risks through all market environments.

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Fund Leverage

IMPACT OF THE FUNDS’ LEVERAGE STRATEGY ON PERFORMANCE

One important factor impacting the returns of the Funds’ common shares relative to their comparative benchmarks was the Funds’ use of leverage through their issuance of preferred shares and/or investments in inverse floating rate securities, which represent leveraged investments in underlying bonds. The Funds use leverage because our research has shown that, over time, leveraging provides opportunities for additional income. The opportunity arises when short-term rates that a Fund pays on its leveraging instruments are lower than the interest the Fund earns on its portfolio of long-term bonds that it has bought with the proceeds of that leverage. This has been particularly true in the recent market environment where short-term rates have been low by historical standards.

However, use of leverage can expose Fund common shares to additional price volatility. When a Fund uses leverage, the Fund’s common shares will experience a greater increase in their net asset value if the municipal bonds acquired through the use of leverage increase in value, but will also experience a correspondingly larger decline in their net asset value if the bonds acquired through leverage decline in value, which will make the shares’ net asset value more volatile, and total return performance more variable, over time.

In addition, common share income in levered funds will typically decrease in comparison to unlevered funds when short-term interest rates increase and increase when short-term interest rates decrease. In recent quarters, fund leverage expenses have generally tracked the overall movement of short-term tax-exempt interest rates. While fund leverage expenses are somewhat higher than their all-time lows after the 2007-2009 financial crisis, which has contributed to a reduction in common share net income and long-term total return potential, leverage nevertheless continues to provide the opportunity for incremental common share income. Management believes that the potential benefits from leverage continue to outweigh the associated increase in risk and volatility previously described.

Leverage from issuance of preferred shares had a positive impact on the total return performance of the Funds over the reporting period. The use of leverage through inverse floating rate securities was negligible to the total return performance of the Funds over the reporting period. Subsequent to the close of the reporting period, the outbreak of the COVID-19 pandemic led to a significant downturn in global economies and capital markets. As security prices fell, each Fund’s use of leverage impacted total returns negatively.

As of February 29, 2020, the Funds’ percentages of leverage are as shown in the accompanying table.

 

 

 

 

Refer to Notes to Financial Statements, Note 5 – Fund Shares, Preferred Shares for further details on preferred shares and each Fund’s respective transactions.

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Each Fund seeks to pay regular monthly dividends out of its net investment income at a rate that reflects its past and projected net income performance. To permit each Fund to maintain a more stable monthly dividend, the Fund may pay dividends at a rate that may be more or less than the amount of net income actually earned by the Fund during the period. Distributions to common shareholders are determined on a tax basis, which may differ from amounts recorded in the accounting records. In instances where the monthly dividend exceeds the earned net investment income, the Fund would report a negative undistributed net ordinary income. Refer to Note 6 – Income Tax Information for additional information regarding the amounts of undistributed net ordinary income and undistributed net long-term capital gains and the character of the actual distributions paid by the Fund during the period.

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Common Share Information (continued)

All monthly dividends paid by each Fund during the current reporting period were paid from net investment income. If a portion of the Fund’s monthly distributions is sourced or comprised of elements other than net investment income, including capital gains and/or a return of capital, shareholders will be notified of those sources. For financial reporting purposes, the per share amounts of each Fund’s distributions for the reporting period are presented in this report’s Financial Highlights. For income tax purposes, distribution information for each Fund as of its most recent tax year end is presented in Note 6 – Income Tax Information within the Notes to Financial Statements of this report.

CHANGE IN METHOD OF PUBLISHING NUVEEN CLOSED-END FUND DISTRIBUTION AMOUNTS

During November 2019, the Nuveen Closed-End Funds discontinued the practice of announcing Fund distribution amounts and timing via press release. Instead, information about the Nuveen Closed-End Funds’ monthly and quarterly periodic distributions to shareholders are posted and can be found on Nuveen’s enhanced closed-end fund resource page, which is at www.nuveen.com/closed-end-fund-distributions, along with other Nuveen closed-end fund product updates. Shareholders can expect regular distribution information to be posted on www.nuveen.com on the first business day of each month. To ensure that our shareholders have timely access to the latest information, a subscribe function can be activated at this link here, or at this web page (www.nuveen.com/en-us/people/about-nuveen/for-the-media).

 

During the current reporting period, the Funds did not repurchase any of their outstanding common shares.

 

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Risk Considerations and Investment Policy Updates

Risk Considerations

Fund Shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation.

Nuveen Arizona Quality Municipal Income Fund (NAZ)

Nuveen Michigan Quality Municipal Income Fund (NUM)

Nuveen Ohio Quality Municipal Income Fund (NUO)

Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee the Fund’s investment objectives will be achieved. Closed-end fund shares may frequently trade at a discount or premium to their net asset value. Debt or fixed income securities such as those held by the Fund, are subject to market risk, credit risk, interest rate risk, derivatives risk, liquidity risk, and income risk. As interest rates rise, bond prices fall. Leverage increases return volatility and magnifies the Fund’s potential return and its risks; there is no guarantee a fund’s leverage strategy will be successful. State concentration makes the Fund more susceptible to local adverse economic, political, or regulatory changes affecting municipal bond issuers. These and other risk considerations such as inverse floater risk and tax risk are described in more detail on the Fund’s web page at www.nuveen.com/NAZ, www.nuveen.com/NUM and www.nuveen.com/NUO.

Investment Policy Updates

Change in Investment Policy

Each of the Funds has recently adopted the following policy regarding limits to investments in illiquid securities:

While there are no such limits imposed by applicable regulations, certain Nuveen Closed-End Funds formerly had investment policies that placed limits on a Fund’s ability to invest in illiquid securities. All exchange-listed Nuveen Closed-End Funds now have no formal limit on their ability to invest in such illiquid securities, but each Fund’s portfolio management team will monitor such investments in the regular, overall management of the Fund’s portfolio securities.

New Temporary Investment Policy

Each of the Funds has adopted the following policy regarding its temporary investments.

Each Fund may temporarily depart from its normal investment policies and strategies – for instance, by allocating up to 100% of its assets to cash equivalents, short-term investments, or municipal bonds that do not comply with a Fund’s Name Policy – in response to adverse or unusual market, economic, political or other conditions. Such conditions could include a temporary decline in the availability of municipal bonds that comply with a Fund’s Name Policy. During these periods, the weighted average maturity of a Fund’s investment portfolio may fall below the defined range described in the respective Fund Summary under “Principal Investment Strategies” and a Fund may not achieve its investment objective to distribute income that is exempt from regular federal and state personal income tax.

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Past performance is not predictive of future results. Current performance may be higher or lower than the data shown. Returns do not reflect the deduction of taxes that shareholders may have to pay on Fund distributions or upon the sale of Fund shares. Returns at NAV are net of Fund expenses, and assume reinvestment of distributions. Comparative index return information is provided for the Fund’s shares at NAV only. Indexes are not available for direct investment.

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This data relates to the securities held in the Fund’s portfolio of investments as of the end of the reporting period. It should not be construed as a measure of performance for the Fund itself. Holdings are subject to change.

For financial reporting purposes, the ratings disclosed are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. This treatment of split-rated securities may differ from that used for other purposes, such as for Fund investment policies. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Holdings designated N/R are not rated by these national rating agencies.

 

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Past performance is not predictive of future results. Current performance may be higher or lower than the data shown. Returns do not reflect the deduction of taxes that shareholders may have to pay on Fund distributions or upon the sale of Fund shares. Returns at NAV are net of Fund expenses, and assume reinvestment of distributions. Comparative index return information is provided for the Fund’s shares at NAV only. Indexes are not available for direct investment.

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This data relates to the securities held in the Fund’s portfolio of investments as of the end of the reporting period. It should not be construed as a measure of performance for the Fund itself. Holdings are subject to change.

For financial reporting purposes, the ratings disclosed are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. This treatment of split-rated securities may differ from that used for other purposes, such as for Fund investment policies. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Holdings designated N/R are not rated by these national rating agencies.

 

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Past performance is not predictive of future results. Current performance may be higher or lower than the data shown. Returns do not reflect the deduction of taxes that shareholders may have to pay on Fund distributions or upon the sale of Fund shares. Returns at NAV are net of Fund expenses, and assume reinvestment of distributions. Comparative index return information is provided for the Fund’s shares at NAV only. Indexes are not available for direct investment.

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This data relates to the securities held in the Fund’s portfolio of investments as of the end of the reporting period. It should not be construed as a measure of performance for the Fund itself. Holdings are subject to change.

For financial reporting purposes, the ratings disclosed are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. This treatment of split-rated securities may differ from that used for other purposes, such as for Fund investment policies. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Holdings designated N/R are not rated by these national rating agencies.

 

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