Municipal Bond CEFs: Unexplainable Weakness Continues

In late May, I had noted that over 25% of the lowest performing funds on the week were municipal funds, primarily those offered by BlackRock and Nuveen. Here's an update on those funds I covered then.

click to enlarge

For perspective, I've included a comparison of the worst % change performers since I started this analysis against a Morgan Stanley municipal fund.

Note that the BlackRock Strategic Municipal Trust is down more than 5% relative to the MS fund YTD. The Virgina fund seems to have the worst time of all, trading at over 10% below the MS fund YTD. There are a number of possible reasons for this, though none seem particularly clear. Some of this might be competition taking its toll in the CEF market, some an instance of issuer credibility premium, and obviously some related to yield changes, but overall, there is still some broad and high-dollar-value selloff going on in municipal bond CEFs.

Comments

[mavericks:]

Alot of these funds are (or were) at premiums, leveraged and some are cutting dividends. Deadly combination in a rising interest rate environment. BTW, stick with the PIMCO muni funds and stay away from Nuveen. The difference is pretty incredible.

2007 Jun 18 10:46 AM

[Michael Bom...:]

Your points about the premium and leverage issues are good ones, but I just wanted to note that these returns are calculated on adjusted prices, so these represent return including the value of the dividends.

That we see such large losses even after discounting for the dividends is primarily why I just can't believe that this is all to do with rate sensitivity.

2007 Jun 18 10:57 AM

[Michael Bom...:]

You might also be interested in a much larger piece I did about the whole muni CEF market - 221 funds, to be exact. I do use a PIMCO fund there as the correlation benchmark, and yes, it does seem as if there is a real issuer premium that Nuveen is lacking in the market's eyes.

2007 Jun 18 10:59 AM

[mavericks:]

Yeah, I've been following the muni CEF market for awhile but I don't own any right now. One thing I learned was that Nuveen has too many funds and none of them seem to outperform whereas PIMCO's funds (not just munis) typcially offer higher yields and rare dividend cuts. As a result, they outperform but also trade at higher premiums. I own mostly floating rate CEF's right now which have done great with a rising interest rate environment. PFN (which I own) was mentioned in Barron's over the weekend by Bill Gross and is getting a nice pop today. I'll check out your other muni piece.

2007 Jun 18 12:43 PM

[mavericks:]

Wow, I confess I did not know how much the muni CEF's have gotten hit this month.

2007 Jun 18 01:06 PM

[strongopinion:]

I dont understand why the blackrock etf munis such as BNY are takuing such a beatring. Currently they have not missed a dividend and are paying out 9.5%. What is causing this. As I understand it they are at this time able to roll over the loans financing their Preferred Shares. Can any one shed some light on this condition.

2008 Dec 08 06:08 AM