NID Nuveen Intermediate Duration Municipal Term Fund

 

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Table of Contents

 

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Table of Contents

Chair’s Letter
to Shareholders

Dear Shareholders,

More than a year has passed since the World Health Organization declared COVID-19 a global pandemic in March 2020, resulting in a year marked by a global economic downturn, financial market turbulence and some immeasurable losses. Although the health crisis persists, with the widespread distribution of vaccines in the U.S. and extraordinary economic interventions by governments and central banks around the world, we collectively look forward to what our “new normal” might be.

Global economic activity has continued to rebound, driving both gross domestic product growth and inflation higher, especially in the U.S. Vaccinations have enabled a further reopening of economies while governments and central banks have taken extraordinary measures to support the recoveries. To extend relief programs enacted earlier in the crisis, the U.S. government passed $900 billion in aid to individuals and businesses in late December 2020. Another $1.9 trillion relief package was signed into law in March 2021 providing extended unemployment benefits, direct payments to individuals and families, assistance to state and local municipalities, grants to education and public health, and other support. Currently, Congress is working on an infrastructure spending plan, although its final shape and whether it passes remains to be seen. The U.S. Federal Reserve (Fed) and other central banks around the world have upgraded their economic forecasts but remain committed to sustaining the recovery by maintaining accommodative monetary conditions. However, as economies have reopened, the surge in consumer demand has outpaced supply chain capacity, resulting in a jump in inflation indicators in recent months. Whether inflation persists is a subject of debate by economists and market observers, while the Fed and other central banks believe it to be more transitory.

While the markets’ longer-term outlook has brightened, we expect intermittent bouts of volatility to continue. Markets are closely monitoring central bank signals, particularly if inflation remains elevated, as a sooner-than-expected shift to monetary tightening could slow the economic recovery. Additionally, COVID-19 cases are still elevated in some regions, as more virulent strains have spread and vaccination rollouts have been uneven around the country and around the world. The recovery hinges on controlling the virus, and estimates vary considerably on when economic activity might be fully restored and what level of public inoculation would be sufficient to contain the virus spread. On the political front, the Biden administration’s full policy agenda and the potential for Congressional gridlock remain to be seen, either of which could cause investment outlooks to shift. Short-term market fluctuations can provide your Fund opportunities to invest in new ideas as well as upgrade existing positioning while providing long-term value for shareholders. For more than 120 years, the careful consideration of risk and reward has guided Nuveen’s focus on delivering long-term results to our shareholders.

If you have concerns about what’s coming next, it can be an opportune time to assess your portfolio. We encourage you to review your time horizon, risk tolerance and investment goals with your financial professional. 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
July 22, 2021

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Portfolio Managers’ Comments

Nuveen Intermediate Duration Municipal Term Fund (NID)

Nuveen Intermediate Duration Quality Municipal Term Fund (NIQ)

These Funds feature portfolio management by Nuveen Asset Management, LLC (NAM), an affiliate of Nuveen Fund Advisors, LLC, the Funds’ investment adviser. Portfolio managers John V. Miller, CFA, Timothy T. Ryan, CFA, Steven M. Hlavin and Daniel J. Close, CFA, discuss U.S. economic and market conditions, key investment strategies and the twelve-month performance of these two Nuveen Funds. John, Tim and Steve have managed NID since its inception in December 2012 and Dan has managed NIQ since its inception in February 2013.

What factors affected the U.S. economy and the national municipal bond market during the twelve-month annual reporting period ended May 31, 2021?

The U.S. economy rebounded more quickly than expected from the deep downturn caused by the COVID-19 crisis and containment measures, but gross domestic product (GDP) shrank 3.5% in 2020 compared to 2019’s annual level. After falling into a deep recession in February 2020 due to the restrictions put on business and social activity to mitigate the COVID-19 spread, the economy bounced back with the help of several factors. These included: Federal government stimulus aiding individuals and businesses, accommodative monetary policy by the Fed that kept borrowing costs low and a gradual reopening of businesses with the roll-out of several FDA approved vaccines. U.S. GDP growth picked up pace in the first quarter of 2021, growing at an annualized rate of 6.4% according to the Bureau of Economic Analysis “second” estimate, an increase from 4.3% (annualized) in the fourth quarter of 2020. 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.

Consumer spending, the largest driver of the economy, rebounded markedly from the steep declines early in the health crisis. Although the momentum slowed toward the end of 2020 amid a resurgence of COVID-19 infections, consumer demand resumed in 2021 as vaccination rates increased and lockdown restrictions eased, eligible Americans received another government stimulus check and the job market continued to improve. By May 2021, the U.S. unemployment rate had fallen to 5.8%, a significant improvement from 13.3% in May 2020 and from the pandemic peak of 14.8% in April 2020, according to the Bureau of Labor Statistics (BLS).

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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 average hourly earnings rate increased, growing at an annualized rate of 2.0% in May 2021, despite the spike in unemployment. However, the BLS pointed out that wage growth trends have been difficult to analyze given the wide variation in average hourly earnings across industries and large fluctuations in employment since February 2020. The overall trend of inflation accelerated, largely due to rising energy prices and the improving economy. The higher annual inflation rate in May 2021 is also the result of the comparison from a year ago, when consumer prices fell sharply as the first lockdowns were imposed in March 2020. The BLS said the Consumer Price Index (CPI) increased 5.0% over the twelve-month reporting period ended May 31, 2021, before seasonal adjustment.

With the onset of the COVID-19 crisis, the Federal Reserve (Fed) enacted an array of emergency measures in March 2020 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 engaging in expanded bond purchases, known as quantitative easing. In August 2020, the Fed announced a change in its inflation targeting policy, moving from a program of absolute targeting to an average inflation targeting policy. Under this regime, the Fed will tolerate the inflation rate temporarily overshooting the target rate to offset periods of below-target inflation, so that inflation averages a 2% target rate over time. In their meetings throughout the first half of 2021, Fed officials continued to signal that accommodative policy measures will stay in place, asserting that recently higher inflation readings are transitory and the economic recovery remains far from the Fed’s goals.

The federal government also intervened with historic relief measures, starting with three aid packages in March and April 2020. These included $2 trillion allocated across direct payments to individuals, an expansion of unemployment insurance, loans to large and small businesses, funding to hospitals and health agencies and support to state and local governments, and more than $100 billion in funding to employers offering paid leave. In December 2020, the government enacted a $900 billion relief package extending some of these programs, and followed in March 2021 with another $1.9 trillion deal providing support to individuals and families, small businesses, state and local governments, education and public health/vaccination. The Biden administration has proposed another $2 trillion stimulus plan focused on infrastructure and jobs, but it is facing legislative hurdles.

By the start of this reporting period, markets had largely stabilized from the initial health crisis shock. In March 2020, equity and commodity markets sold off and safe-haven assets rallied as countries initiated quarantines, restricted travel and shuttered factories and businesses, while an ill-timed oil price war between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC member Russia amplified the volatility. In late 2020, the announcement of high efficacy rates in several COVID-19 vaccine trials, followed by regulatory authorizations and public vaccination drives across Western countries improved the outlook for 2021 and led to risk-on sentiment in the markets. Increasing vaccination rates and some surprisingly strong economic readings in the first few months of 2021 led to rising inflation concerns and an increase in long-term interest rates, but central banks reassured the markets that it was too soon to withdraw stimulus measures.

Geopolitical uncertainty remained elevated during 2020 in anticipation of the U.S. presidential election in November 2020 and the Brexit transition period set to expire in December 2020. However, political risks began to ease with the election of President Joe Biden and a final deal struck between the European Union and U.K. before the end of the transition period. Although China and the U.S. signed a “phase one” trade deal in January 2020, tensions continued to flare over other trade and technology/security issues, Hong Kong’s sovereignty and the management of the COVID-19 crisis. In 2021, geopolitical concerns in the Middle East, Russia and Belarus made news headlines, but market impacts were relatively minimal.

Municipal bonds performed well in this reporting period, reflecting a significant recovery from the COVID-19 crisis sell-off in March 2020. At the time, U.S. Treasury yields fell to historic lows and interest rate volatility increased sharply while municipal bond prices became severely dislocated from Treasury prices and credit spreads widened significantly. With ongoing monetary and fiscal inter-

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ventions from the Fed and U.S. government and credit fundamentals that demonstrated more resilience than initially expected, investor sentiment improved and credit spreads narrowed significantly by the end of the reporting period. Municipal bond yields generally moved lower through the first half of the reporting period, then rose over the second half as fixed income markets priced in a stronger economic growth and inflation outlook and the prospect of more government stimulus. For the twelve-month reporting period overall, municipal yields were little changed at the short end of the yield curve, higher in the intermediate segment and lower at the longest maturities, which flattened the yield curve.

Municipal bond gross issuance nationwide remained strong in the reporting period, with deals postponed rather than canceled during the COVID-19 crisis driven sell-off. The overall low level of interest rates has 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 represented roughly a third of total issuance in 2021 so far. Additionally, the proportion of taxable issuance has risen to about one third of total gross issuance since the advent of the Tax Cut and Jobs Act of 2017, which prohibits municipal issuers from issuing new tax-exempt bonds to pre-refund existing tax-exempt bonds. Thus, the net issuance (all bonds issued less bonds redeemed) of tax exempt municipal bonds is actually much lower than the gross issuance. This lower net issuance was an overall positive technical factor on municipal bond investment performance in recent years and in this reporting period.

While municipal bond funds suffered significant outflows in March 2020, particularly from high yield municipal bond funds, fund flows rebounded strongly over the remainder of 2020 and sustained a robust pace through early 2021. Demand has been resilient even though municipal defaults, as expected, have increased somewhat during the COVID-19 crisis. However, default activity has occurred mainly in sectors with greater COVID-19 risk exposure, such as senior living, corporate-backed and real estate-backed. Moreover, while there are some pockets of municipal credit ratings stress, a wave of downgrades has not materialized. With interest rates in the U.S. and globally still near all-time lows, even after the recent increase in long-term rates, the appetite for yield has continued to drive investors toward higher after-tax yielding assets, including U.S. municipal bonds. Additionally, as taxpayers have adjusted to 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, especially in states with high income taxes and/or property taxes.

What key strategies were used to manage the Funds during the twelve-month reporting period ended May 31, 2021?

The Funds’ primary investment objective is to provide a high level of current income exempt from regular federal income tax. The Funds’ secondary investment objective is to seek additional total return. NID has a 10-year term and intends to liquidate and distribute its then-current net assets to shareholders on or before March 31, 2023. NIQ has a 10-year term and intends to liquidate and distribute its then-current net assets to shareholders on or before June 30, 2023.

Municipal bond performance was positive during the reporting period. Municipal bond yields rose across much of the yield curve (except for longer maturities, where yields fell) over the reporting period, with volatility in between. An improving municipal credit outlook, along with demand for higher yielding investments lower down the credit spectrum and the increasing scarcity value of tax exempt municipal bonds, provided a favorable backdrop for credit spreads to continue to grind tighter, driving performance gains for lower rated and high yield municipal credit.

Management continues 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. NID’s trading was mainly driven by the reinvestment of coupon income and the proceeds of called and maturing bonds, and in this reporting period the Fund was more active than usual.

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Portfolio Managers’ Comments (continued)

Early in the reporting period, given the market’s more widespread low prices, NID bought credits that appeared oversold relative to their long-term fundamentals, including issues for New Jersey Transportation, American Airlines, United Airlines, New York Metropolitan Transportation Authority (MTA), U.S. Steel and the city of Chicago. By early 2021, market technicals strengthened, credit spreads had narrowed meaningfully and buying became much more opportunistic and very credit specific. For example, NID bought more Puerto Rico sales tax revenue bonds (known as COFINAs), which we believe have further room to recover.

NIQ bought generally higher credit quality credits (due to their greater availability in the primary market) with 4% and 5% coupon structures, mainly in the new issue market. The Fund added bonds from five different sectors in the second half of the reporting period. NIQ’s newest purchases included two toll roads (Harris County in Texas and Pennsylvania State Turnpike), a local general obligation (GO) for Wayne County Michigan Finance Authority Distributed State Aid, an “other revenue” bond for Queens Ballpark, two dedicated tax revenue bonds (Colorado Regional Transportation District and Triborough Bridge and Tunnel Authority MTA Payroll Mobility Tax Bonds) and one water and sewer (Phoenix Water System). There were no sales to fund these buys, as called and maturing bonds provided ample cash.

As of May 31, 2021, both Funds continued to use inverse floating rate securities. The Funds employ inverse floaters for a variety of reasons, including duration management, income enhancement and total return enhancement. As part of our duration management strategies, NID shorted interest rate futures contracts to help reduce price volatility risk due to movements in U.S. interest rates relative to the Fund’s benchmark. The Funds have allowed the positions to roll off over time, reducing the amount of hedging in the portfolio. The futures contracts had a negligible impact on NID’s performance in this reporting period.

How did NID and NIQ perform during the twelve-month reporting period ended May 31, 2021?

The tables in each Fund’s Performance Overview and Holding Summaries section of this report provide the Funds’ total returns at net asset value (NAV) for the period ended May 31, 2021. Each Fund’s total returns at common share NAV are compared with the performance of a corresponding market index.

For the twelve months ended May 31, 2021, the total returns at common share NAV for NID outperformed the returns for both the S&P Intermediate Duration Municipal Yield Index and the S&P Municipal Bond Index, and NIQ outperformed the returns for both the S&P Municipal Bond Intermediate Index and the S&P Municipal Bond Index. Please see Glossary of Terms for index definitions. For the purposes of this Performance Commentary, the references to relative performance of NID is in comparison to the S&P Intermediate Duration Municipal Yield Index and NIQ is in comparison to the S&P Municipal Bond Intermediate Index.

The main factors influencing the Funds’ relative performance during this reporting period were duration and yield curve positioning, credit ratings allocations, sector positioning and credit selection. In addition, the use of regulatory leverage was an important factor affecting the performance of the Funds. Leverage is discussed in more detail later in the Fund Leverage section of this report.

Given the “bullish” flattening in the yield curve, longer-term rates declined by more than shorter-term rates, longer duration bonds generally outperformed shorter duration bonds during the reporting period. NID’s overall longer duration than its benchmark, the S&P Intermediate Duration Municipal Yield Index, and overweight to the longer duration range and underweight to shorter duration bonds was favorable to relative performance. NIQ also benefited from its duration and yield curve positioning. Although an overweight to the zero to 2-year duration category detracted from performance relative to the S&P Municipal Bond Intermediate Index, the negative impact was more than offset by overweight allocations to the 10- to 12-year duration category and the 12-years and longer category, which were positive contributors.

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Looking at credit ratings, lower rated and high yield bonds outperformed high grade (AAA and AA rated) bonds in this reporting period, driven by the recovery in credit spreads. NID’s overweight to below investment grade bonds was the most additive to relative performance versus the S&P Intermediate Duration Municipal Yield Index. NIQ held advantageous underweights to AAA and AA rated debt and overweights to A, BBB, BB and non-rated bonds, which contributed meaningfully to relative performance against the S&P Municipal Bond Intermediate Index.

NID’s sector positioning yielded mixed results relative to the S&P Intermediate Duration Municipal Yield Index in this reporting period. The Fund’s underweights in certain sectors that outperformed, including state GOs and transportation, dampened relative performance. An overweight allocation in hospitals, which underperformed, was another headwind to relative performance. Conversely, overweight allocations to appropriation debt and tobacco securitization debt, sectors which outperformed, contributed positively to NID’s relative outperformance. An underweight to Puerto Rico was disadvantageous given the sector’s outperformance, but NID’s security selections performed better than the benchmark and more than made up for the relative loss of the underweight allocation. The industrial development revenue (IDR) sector was a strong performer, but NID held a roughly equal sector weight to the benchmark, resulting in a neutral impact to relative performance.

For NIQ, sector allocations in aggregate detracted from performance relative to the S&P Municipal Bond Intermediate Index. While an overweight allocation to tobacco was beneficial, the drag from underweights to the “other transportation” sector (primarily MTA bonds) and the IDR sector outweighed the relative gains from the tobacco sector.

Individual credit selection was favorable to NID’s relative performance. The elevated market volatility in this reporting period generated considerable variability in returns at the individual credit level. While NID held many positions that ended the reporting period with flat to slightly positive returns, there were also a number of holdings with double-digit gains and a few positions that lost value. Some of NID’s best performing holdings included U.S. Steel, New Jersey Transportation, sales tax securitization bonds, Illinois GOs, Chicago Board of Education, Brightline Trains, Baltimore Convention Center and Franklin County Columbus (Ohio) Convention Center. NID held a few small positions in proton cancer therapy facilities that declined over the reporting period, but the impact to relative performance was minor given the small size of the positions.

NIQ’s security selection showed mixed results in this reporting period. The Fund’s tender option bonds and holdings in longer dated, mid and lower credit quality (A, BBB and BB rated) names were the most additive to relative performance. Holdings that detracted were some of the credits bought in late 2020/early 2021 (after which prevailing rates moved higher), which generally underperformed over the remainder of the reporting period.

Additionally, NID’s and NIQ’s holdings in Energy Harbor common stock, acquired when holdings of certain municipal bonds issued by FirstEnergy Solutions were converted into Energy Harbor equity as part of the company’s emergence from bankruptcy protection, was among the weaker performing positions in this reporting period. Over time, we expect to sell these shares and reinvest the proceeds into municipal bonds.

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Fund Leverage

IMPACT OF THE FUNDS’ LEVERAGE STRATEGIES 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 a 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. All this will make the shares’ 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 recent lows, leverage nevertheless continues to provide the opportunity for incremental common share income, particularly over longer-term periods.

Leverage had a positive impact on the total return performance of the Funds over the reporting period.

As of May 31, 2021, the Funds’ percentages of leverage are as shown in the accompanying table.

 

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Refer to Notes to Financial Statements, Note 5 – Fund 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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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 from 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, 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.

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