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Investors in municipal bond closed end funds (CEFs) had a bad day today. This may not be widely known, although muni CEFs have a market cap of $50BN in aggregate. But there are some signs that bond investors seeking tax-exempt income have overreached. Enticed by stated yields of up to 7% on some funds, investors have inexorably driven the market higher all year. For example, the Nuveen Insured Muni Opportunity Fund ($1.4BN in assets) yields 5.76% (according to Morningstar), helped by 33% leverage. While muni bond prices and their related CEFs have continued to rise, discounts to NAV have flipped signs. So in many cases investors are paying a premium to the NAV of the underlying portfolio for the privelige of paying an additional 1% in management expenses.

Morningstar’s National Municipal Bond Index fell over 1%, and many funds were down 2% or more today. These are large moves for a normally stable sector, and the combination of low bond yields with many funds trading at a premium means that there’s very little for a value-driven investor to find at current prices. Although we have been investors in some of these funds in the past, we recently exited the sector completely. Prices may yet recover, but we think there’s the potential for some selling driven by overleveraged investors to create a much better opportunity.

The table below shows the stated yields (in many cases achieved with leverage since muni bond yields are much lower) for some of the largest muni CEFs along with their current premium to NAV.

Ticker

Market Cap $MM

Yield %

Discount/Premium to NAV %

NUV

2,005

4.63

+2.64

NIO

1,439

5.76

0

NPM

1,060

5.95

-0.67

MYI

968

6.04

+2

NPI

950

6.19

+2.35

NPP

936

6.06

+1.57

NQU

835

6.19

+3.16

VGM

812

7.04

+3.45

MYD

681

6.65

+3.12

NMO

680

6.59

+4.58

Source: Morningstar

Disclosure: No positions




Disclosure: None

Source: The Quiet Bear Market in Municipal Bonds