Muni CEF Trading At A 10% Discount And An Extreme Z-Score

| About: Eaton Vance (MMV)

Summary

After Trump's election, munis have been getting a lot of market attention.

The increased market volatility has created some trading opportunities.

MMV has caught my eye because of its attractive relative value.

The good thing about sell-offs is that they bring volatility back to the markets. And traders love volatility, not because they like to see the world burn, but because occasionally, volatility opens the door for some good trading opportunities. Today, I am going to talk to you about one such opportunity in the muni market.

If you have read any of my other articles, you probably know that I rarely talk about opportunities in absolute terms. I don't know whether we are about to see a reversal in the sell-off in the muni market and I don't claim to have such knowledge. What I do know and understand, however, is relative value. I like to look at fixed income products that have had a historically strong statistical relationship, which, for some reason, has broken down. That is enough to get my initial attention. Then, I go one layer deeper and see if fundamentals are supportive of such deviation and if I find that's not the case - then I am ready to put some money on the line.

I know that market participants could be as different as night and day in terms of objectives and investment horizons, so I just want to point out that my approach to decision-making is not aimed at choosing the best fixed income product for my retirement portfolio, but rather focused on exploiting short-term market mispricings, which I have the strong conviction to believe would be corrected in the short term. With that in mind, let me tell you about Eaton Vance Massachusetts Municipal Income Trust (NYSEMKT:MMV).

The Fund

The Massachusetts Municipal Income Trust is a Closed-End Fund (CEF), which, as the name suggests, invests in municipal bonds in the state of Massachusetts. Below you can see a breakdown of the fund's assets by credit rating, some of its top holdings and a distribution by sector:

Click to enlarge

Source: Eaton Vance

As you can see from the chart, more than 94% of the fund's holdings are investment grade and are concentrated predominantly in the healthcare and education sectors.

Its current market price has a distribution rate of 3.97%, which is tax-exempt and equivalent to a taxable distribution rate of 7.39%. In the low interest rate environment we are currently living in, that seems to offer decent return, but, as I mentioned before, this is not what is important for me when I decide whether to buy it or not. It's the CEF's relative pricing that matters to me.

The Opportunity

I am using my proprietary software to try to identify other CEFs which have a strong linear relationship in terms of market price performance. In the chart below, you can see a relative comparison between and one such fund - the iShares National AMT-Free Muni Bond ETF (NYSEARCA:MUB).

Click to enlarge

Source: Author's proprietary software

The 200-day correlation between the two is 0.78 and is even stronger over the last 20 days at 0.85, which is no surprise given the general behavior of similar assets in sell-off conditions.

In the bottom right corner of the chart above, you can see how a portfolio with long and short with zero initial outlay would have behaved during the last 6 months. For most of the period, that portfolio would have resulted in a net profit, but recently, that same portfolio has started moving into negative territory. And part of the reason lies in the recent price dynamics of MMV.

You can see what I mean by looking at the upper right corner of the chart above. The graph there shows the historical relationship between MMV and its NAV. MMV has historically traded at a discount to its NAV, but the magnitude of that discount has increased markedly over the past couple of days. In fact, as the chart below indicates, MMV has traded at such a large discount to its NAV only 0.5% of the time in the last 200 days.

Source: Author's Software

Current price levels indicate an attractive trade opportunity as I expect the fund to move closer to its NAV. A discount of 4-6% seems much more reasonable from a statistical point of view and since I do not see any fundamental reason for the observed deviation, I think that MMV offers a good trading opportunity.

Conclusions

MMV has strayed away from its NAV and is currently trading at a discount of 10.5%. The historical relationship between the CEF and its benchmark has also been broken. At the same time, no fundamental reason exist for the observed deviation.

I believe that the price dynamics could be largely attributed to technicals and that at its current price offers a good entry point. If you like the fund from a fundamental standpoint, it might be a good idea to consider getting some exposure.

Disclosure: I am/we are long MMV.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.