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If you turn the clock back less than two weeks to March 12, you would find most muni bond CEFs were over valued and selling at premiums above net asset value or at below average discounts. But quite a bit has changed since then.

Treasury yields started rising quickly which affected many low risk fixed income investments. On March 14, Meredith Whitney appeared on CNBC and repeated her prediction from last year that there will be "a wave of municipal defaults". (According to astronomers, the Sun will eventually expand and eat up several planets- first Mercury, then Venus and then Earth. Because of this, Meredith's prediction will certainly come true at some point).

By the end of last week, some muni bond CEFs had dropped in price by about 8%, even though the net asset values only fell about 1%. Discounts have now returned to the lowest levels since August of last year.

On the morning of March 19, most muni bond CEFs fell even lower, but then seemed to form a bottom and closed up for the day.

I have selected two muni bond CEFs which could be good candidates to play for a short term bounce in prices. One fund is leveraged, the other is unleveraged. I looked for funds with the following criteria:

  • Selling at a discount to NAV with highly negative Z-stat scores. The Z-stat score tells you how many standard deviations the discount is below the average discount over that time period.
  • Low expense ratio: In case the "bounce" does not occur, the fund can be held longer term.
  • High trading volume: Easy to get in and out

Two Muni Bond CEFs to Play for a Short Term Bounce

1) Nuveen Municipal Value Fund (NYSE:NUV)

  • Total Common Assets: 1.97 Billion
  • Leverage: None
  • Expense ratio= 0.65%
  • Discount= -2.72%
  • Avg 6 Month discount= +0.50%
  • Annual Distribution Rate (market price) = 4.84%
  • Today's Volume= 547K
  • Avg Three Month Volume= 340K

Z-Stats as of March 19, 2012

  • Three Month Z-Stat= -6.12 (over six standard deviations!)
  • Six Month Z-Stat= -4.57

2) Dreyfus Strategic Municipal Bond Fund (NYSE:DSM)

  • Total Net Assets: 554 Million
  • Total Common Assets: 415 Million
  • Leverage: 32.4%
  • Expense Ratio= 0.85%
  • Discount= -3.17%
  • Avg 6 Month Premium= +2.38%
  • Annual Distribution Rate (market price) = 6.92%
  • Today's Volume= 640K
  • Avg 3 month Volume= 128K

Z-Stats as of March 19, 2012

  • Three Month Z-Stat= -4.36
  • Six Month Z-Stat= -3.38
Source: How To Play For A Short Term Bounce In Muni Bond CEF Prices