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The time may have come for one of the best trading opportunities of the year- the January effect, where you buy stocks in the last few weeks of the year that are artificially depressed by investors selling them for tax reasons. These stocks often experience a nice bounce in January when the selling pressure eases up.

One of the best ways this year to capitalize on this strategy may come from this year's crop of municipal bond CEF initial public offerings.

1) Every investor who bought at the IPO is holding the fund at a loss, and most investors who bought in later are also sitting on a loss.

2) The holding period is under one year, so investors can realize short-term capital losses which are more valuable than long term capital losses.

I previously wrote articles on CEF IPOs in the high yield bond and senior loan asset classes and am following up today with a third article on busted municipal bond CEFs.

The municipal bond CEFs have had a rough year. They have been hurt by rising interest rates, mutual fund outflows and bad press from the Detroit bankruptcy. But valuations have become very compelling- double digit discounts to NAV, 120% spreads over US Treasuries and tax equivalent yields as high as 15% in states like New York and California.

Fundamentals for municipal bonds have actually strengthened this year. There have been state tax rate increases in California and Illinois and increases in sales taxes, personal income tax and property taxes paid across the nation. Muni defaults have been very low- A few billion in Detroit and Jefferson City out of a $3 Trillion market or about 0.1%.

Some of the technical indicators are also positive:

- Federal tax rates have gone up at the top from 35% to 43% including the 3.8% surcharge.

- there has been negative net new supply.

- the steep municipal curve is good for leveraged funds.

The overriding technical negative has been mutual fund outflows. We have seen over $50 billion in outflows since May, but this is based primarily on investor psychology which seems to be reversing now.

There are four municipal bond CEF's that had their IPO within the 13 months.

I) Nuveen Intermediate Duration Quality Muni (NIQ)

Inception Date: February 7, 2013

Inception Price: $15.00

Inception NAV: $14.30

  1. Invests in Federally tax exempt municipal securities with an intermediate effective duration of between three and ten years (including leverage).
  2. The Fund's investment objectives are income and total return, with the emphasis on income.
  3. The Fund invests at least 80% in municipal securities rated investment grade of Baa/BBB or better.
  4. The fund uses leverage.
  5. The fund has a 10-year term and intends to liquidate and distribute its then current NAV to shareholders on or before June 30, 2023.

Asset Allocation (as of 11/29/2013)

Municipal Securities

97.6%

Forward swap

0.8%

Net Other Assets

1.6%

Top Ten Issuers (as of 11/29/2013)

Atlantic City

3.92%

Puerto Rico (Insured)

3.83%

Detroit (Water/Sewer)

3.62%

Texas Municipal Gas

2.89%

Tobacco Settlement

2.69%

Illinois State

2.37%

Tennessee energy Ac

2.05%

Rhode Island Health

1.90%

Foothill/Eastern Tr

1.87%

New Jersey State

1.81%

As of November 30, 2013, the fund reported NAV performance of -7.78%, but the market price had dropped a whopping 22.10%. The current NAV of 12.76 is well below the inception NAV of 14.30 even after you add back an additional $0.4324 paid in distributions.

Morningstar gives the 3-month NAV return of +1.46% which compares well with the +1.35% return of the Barclays Municipal TR USD index.

NIQ is currently selling at a discount to NAV of -9.87%, so a long term buy and hold investor will recover about 1% a year when the fund liquidates in 2023. This more than pays for the fund's expense ratio. At the IPO in late June, it sold at a premium of 4.7%.

Here are some other stats on AIF:

Nuveen Intermediate Duration Quality Muni (NIQ)

  1. Total Assets: 222MM Total Common assets: 167MM
  2. Annual Distribution (Market) Rate= 5.05%
  3. Last Regular Monthly Distribution= $0.048 (Annual= $0.576)
  4. Current monthly EPS= $0.0499 (as of 10/31/2013)
  5. Avg. UNII Per share= $0.0492 (as of 10/31/2013)
  6. Fund Baseline Expense ratio: 0.85%
  7. Discount to NAV= -9.87%
  8. Leverage-Adjusted Effective Duration: 9.53
  9. Average Bond price= $100.39
  10. Effective Leverage= 38%
  11. Avg. Daily Trading Volume= 61,000 shares
  12. Fund liquidates in 2023.

II) Nuveen Intermediate Duration Muni (NYSE:NID)

Inception Date: December 6, 2012

Inception Price: $15.00

Inception NAV: $14.30

1) Invests in Federally tax exempt municipal securities with an intermediate effective duration of between three and ten years (including leverage).

2) The Fund's investment objectives are income and total return, with the emphasis on income.

3) The Fund invests at least 50% in municipal securities rated investment grade of Baa/BBB or better.

4) The fund uses leverage.

5) The fund has a 10-year term and intends to liquidate and distribute its then current NAV to shareholders on or before March 31, 2023.

NID is similar to NIQ in some ways, but it holds lower rated bonds.

Asset Allocation (as of 11/29/2013)

Municipal Securities

98.0%

Forward Swap

0.4%

Net Other Assets

1.5%

Top Ten Issuers (as of 11/29/2013)

Puerto Rico (40% insured)

3.96%

Texas Municipal Gas

3.40%

Jefferson County

3.06%

AMR Corporation

2.78%

Buckeye Tobacco Sett.

2.71%

Detroit

2.49%

Golden State Tobacco

2.06%

MuniMae Tax Exempt

1.76%

Guam

1.58%

Austin Convention Ctr

1.44%

Credit Quality (as of 11/29/2013)

AAA

2.7%

AA

6.4%

A

14.4%

BBB

18.3%

BB

17.4%

B

14.8%

CCC

1.3%

CC

0.0%

No Rating

24.7%

The IPO for NID came out last December when the 10-year treasury rate was below 2%. Like most bond funds, it has been hit pretty hard since then. The NAV of 12.65 is below the inception NAV of 14.30, even after adding back the $0.606 the fund has paid out in dividends.

Morningstar gives its year-to-date NAV return as -5.95% which underperformed the -2.45% return of the Barclays Municipal TR USD index, but is similar to the -5.47% return of its high yield municipal competitors.

On the other hand, the market price YTD return is -20.37% which explains why this may be a good tax loss "bounce" candidate.

NID is currently selling at a discount to NAV of -10.27% compared to the average discount of -4.64% since inception. At the IPO last December, it sold at a premium of 4.7%.

Here are some other stats on NID:

Nuveen Intermediate Duration Muni

  1. Total Assets: 769MM Total Common assets: 594MM
  2. Annual Distribution (Market) Rate= 5.89%
  3. Last Regular Monthly Distribution= $0.055 (Annual= $0.66)
  4. % AMT: 10.5%
  5. Fund Expense ratio: 0.89%
  6. Discount to NAV= -10.27%
  7. Leverage-Adjusted Effective Duration: 9.03
  8. Effective Leverage: 37%
  9. Avg. Daily Trading Volume= 243,000 shares
  10. Fund liquidates in 2023.

III) Eaton Vance Municipal Income Term Trust (NYSE:ETX)

Inception Date: March 26, 2013

Inception Price: $20.00

Inception NAV: $19.10

1) Takes an active management approach to identify and exploit opportunities to enhance portfolio income and return through relative value trading.

2) Fund Objective: To provide current income exempt from regular Federal income tax. Invests primarily in municipal obligations- both investment grade or below investment grade.

3) The Trust has a term of fifteen years and will liquidate on or about June 30, 2028.

4) The Trust anticipates using leverage to seek to enhance returns, initially by investing in residual interest bonds. Residual interest bonds are securities that pay interest at rates that vary inversely with changes in prevailing short-term interest rates and provide the economic effect of leverage.

Credit Quality (as of 09/30/2013)

AAA

4.7%

AA

37.1%

A

33.6%

BBB

17.5%

BB

3.4%

B

0.4%

No Rating

3.3%

The IPO for ETX came out in March when the 10-year treasury rate was below 2%. Like most bond funds, it has been hit pretty hard since then. The NAV of 16.05 is below the inception NAV of 19.10, even after adding back the $0.4248 the fund has paid out in dividends.

Morningstar gives its recent three month NAV return as 2.87% which outperformed the 1.35% return of the Barclays Municipal TR USD index, and the 1.24% return of its municipal national long competitors.

ETX is currently selling at a discount to NAV of -6.67% compared to the average discount of -8.83% since inception. Its discount got as high as -13% last month, but it has run up recently because of an article by Doug Kass. I would not recommend this now as a tax loss "bounce" candidate unless the discount returns to at least -9% over the next two weeks.

Here are some other stats on ETX:

Eaton Vance Municipal Income Term Trust

  1. Total Assets: 165MM Total Common assets: 165MM
  2. Annual Distribution (Market) Rate= 5.70%
  3. Last Regular Monthly Distribution= $0.0708 (Annual= $0.8496)
  4. % AMT: 14.5%
  5. Fund Expense ratio: 0.77%
  6. Discount to NAV= -6.67%
  7. Effective Leverage: 42.3% (residual interest bonds)
  8. Avg. Daily Trading Volume= 71,000 shares
  9. Fund liquidates in 2028.

IV) Dreyfus Muni Bond Infrastructure (NYSE:DMB)

Inception Date: April 26, 2013

Inception Price: $15.00

Inception NAV: $14.30

1) Fund Objective: Seeks a high level of current income exempt from regular federal income tax by investing in municipal bonds issued to finance infrastructure sectors and projects in the United States.

2) Sub-advised by Standish, with a focus on credit research and timely trade execution.

3) Infrastructure sectors and projects in which the fund may invest include transportation, energy & utilities, social infrastructure and water & environmental.

Credit Quality (as of 10/31/2013)

AA

15.18%

A

23.14%

BBB

27.00%

BB

17.42%

B

7.95%

No Rating

6.83%

Net cash

2.50%

The IPO for DMB was in late April when the 10-year treasury rate was below 1.70%. With the benefit of hindsight, its ticker describes the timing of the IPO for the initial investors- "dumb".

Like most bond funds, it has been hit pretty hard since then. The NAV of 11.33 is below the inception NAV of 14.30, even after adding back the $0.375 the fund has paid out in distributions.

Morningstar gives its recent three month NAV return as -0.11% which underperformed the 0.85% return of the Barclays Municipal TR USD index, and the 1.24% return of its municipal national long competitors.

DMB is currently selling at a discount to NAV of -8.91% compared to the average discount of -8.22% since inception. Its discount got as high as -13% on November 29, but it has run up recently because of several articles in Barron's recommending municipal bond CEFs. I would not recommend this now as a tax loss "bounce" candidate unless the discount returns to at least -10% over the next two weeks.

Here are some other stats on DMB:

Dreyfus Muni Bond Infrastructure

  1. Total Assets: 242 MM Total Common assets: 192 MM
  2. Annual Distribution (Market) Rate= 7.25%
  3. Last Regular Monthly Distribution= $0.0625 (Annual= $0.75)
  4. % AMT: 14.45%
  5. Fund Expense ratio: 1.38%
  6. Discount to NAV= -8.91%
  7. Effective Leverage: 34.4% (tender option bonds, preferred)
  8. Levered Effective Duration: 14.30
  9. Avg. Daily Trading Volume= 25,000 shares

All four of the above recent IPOs are worth tracking over the next two weeks, and they could be good candidates to play the tax loss selling "bounce" strategy if/when their discount widens to 10% or greater.

Source: Year-End Opportunity In Busted Muni CEF IPOs?