Income investors looking for a way to play the boom in artificial intelligence can look to municipal bonds connected to data centers, according to Nuveen. A lot has been made of the need for data centers to provide the infrastructure for AI, and subsequently, the increasing demand to power them. The power consumption by data centers is expected to account for almost half of the demand in electricity growth between now and 2030, a new report from the International Energy Agency found . Public power bond issuance totaled $26.8 billion in 2024, up from an annual average of $14 billion over the last 10 years, Nuveen said in a recent report. Municipal bonds are favored by wealthy investors because they are free of federal tax and, if the investor lives in the state in which the bond is issued, exempt from state tax as well. The bonds have underperformed this year , lagging other fixed-income assets in the first quarter and taking a hit after President Donald Trump announced his sweeping tariff policy earlier this month. Dan Close, head of municipals at Nuveen, chalked the dismal performance to a number of things happening in the market, including a lot of supply and people selling the bonds to pay taxes. On top of that, uncertainty hit investors and there were liquidity issues. However, he believes fundamentals remain pretty solid. For those looking to get in on the data center plays, it is “early innings,” he said. Public power bonds are one avenue to take, he suggested. The facilities currently consume between 3% and 4% of the power produced in the U.S, Close said, and he anticipates that will increase to almost 8% by 2030. Electric utilities are expected to increase capital spending and infrastructure investment at a time when capital expenditures are already high, he said. “It’s going to be a growing part of the municipal bond market over the next five years, over the next 10 years,” Close said. “For investors, it does present a good opportunity set, just given the stability of public power providers, and especially if we do see this kick up an issuance, it does present an opportunity where the levels could get cheaper.” For instance, Nuveen holds bonds from the South Carolina Public Service Authority in its Intermediate Duration Municipal Bond Fund. NMBAX YTD mountain Nuveen Intermediate Duration Municipal Bond Fund Another way to play the theme is buying general obligation bonds of the local government where the data centers are located, Close said. The centers can be an attractive option for economic development, but the actual impact on the local economy can be difficult to measure, he said. For instance, construction may spur a burst of employment, but the centers require few workers on-site afterwards, he said. However, they can also help bring in other workers and tax dollars to the area, he added. Meanwhile, the local governments will see a tax revenue boost through property and sales levies, Close noted. Yet many also provide tax incentives to attract data centers. One local government that has benefited is Loudoun County, Virginia. The county has $2 billion in outstanding municipal bonds, as of June 30, 2024, according to Nuveen’s report. Its data centers added $16 billion to Loudoun County’s $174 billion property tax base in 2024, the report said. The county expects total government revenue to increase 11% in fiscal 2026, while lowering the real estate tax by 7% at the same time, the report noted. Still, Close warned that credit selection is key when investing in either public power or general obligation bonds. “Absent the AI boom and absent the construction, we’re looking at the service area and the local economy, the rate setting ability and flexibility — do the local authorities have the ability to set rates and to make sure that they’re making their debt service — how much capital expenditures and debt burdens they have,” Close said. Get Your Ticket to Pro LIVE Join us at the New York Stock Exchange! Uncertain markets? Gain an edge with CNBC Pro LIVE , an exclusive, inaugural event at the historic New York Stock Exchange. In today’s dynamic financial landscape, access to expert insights is paramount. As a CNBC Pro subscriber, we invite you to join us for our first exclusive, in-person CNBC Pro LIVE event at the iconic NYSE on Thursday, June 12. Join interactive Pro clinics led by our Pros Carter Worth, Dan Niles, and Dan Ives, with a special edition of Pro Talks with Tom Lee. You’ll also get the opportunity to network with CNBC experts, talent and other Pro subscribers during an exciting cocktail hour on the legendary trading floor. Tickets are limited!
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