Weekly Municipal Bond CEF Trades

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Includes: EVN, NMZ
by: Arbitrage Trader

Summary

A follow-up of our weekly review of the sector.

Brief examination of the closed-end funds that caught our attention.

Our view and course of action.

Note: This article was originally published for our subscribers on April 1, 2018, and some figures and charts may not be entirely up to date.

Introduction

Closed-end funds do not seem like the best place to be for active traders, at least on paper. However, these products have been our bread and butter for a while now, and as long as we are capable of detecting opportunities and successfully acting on them - we intend to keep on rolling.

Active followers have taken note of the 'Weekly Recap' series and it would only be appropriate to follow these articles with a follow-up, like this one, which highlights the funds of interest to us.

Statistical Comparison and Potential Trades

The municipal bonds continue to suffer at their lows and it is difficult to find a statistical and fundamental reason for potential "Sell."

On the other hand, the sector provides us with many discounted funds. This is a good foundation of our analysis for "Buy" candidates.

The Eaton Vance Municipal Income Trust (EVN) will be my first choice of today's analysis:

Source: CEFConnect.com, The Eaton Vance Municipal Income Trust

The fund got my attention due to the combination of an attractive Discount and relatively low Z-score. I could not miss the fact that it has the highest 5-year return on net asset value in the sector.

Source: CEFConnect.com, The Eaton Vance Municipal Income Trust

Apparently, we are in a time when opportunities can be found in fixed income instruments. Above, the 1-year spread between price and NAV is just confirming the current market environment. Looking back at the 5-year chart, the Discount has never widened so much. The shift to discount might last a while, but who knows what the future has in store for us?

Source: CEFConnect.com, The Eaton Vance Municipal Income Trust

The fund average daily volume of 63,000 shares makes it relatively liquid for this sector. My suggestion is to be careful with the funds which have low average daily volume.

Source: CEFConnect.com, The Eaton Vance Municipal Income Trust

Another piece of important information which you want to include in your analysis are some portfolio characteristics, such as the credit quality breakdown:

Source: CEFConnect.com, The Eaton Vance Municipal Income Trust

It seems good enough to me and there should not be much to worry about. Yes, we can probably find something "safer" in the sector, but in the end of the day it can hardly be the difference-maker.

The assets in the portfolio from issuers located in the United States are 92.01% and the transportation sector has a weight of 14.76%:

Source: CEFConnect.com, The Eaton Vance Municipal Income Trust

Source: CEFConnect.com, The Eaton Vance Municipal Income Trust

The second fund that I considered as interesting is Nuveen Muni High Inc Opp (NMZ):

Source: CEFConnect.com, Nuveen Muni High Inc Opp

This candidate also has the main characteristics that I am looking for. In addition to the satisfying return it has provided to its holders on a 5-year time frame, it currently provides with a statistical edge.

Source: CEFConnect.com, Nuveen Muni High Inc Opp

The chart above proves that if we see a reversal in the sector, this CEF's Market Price and Net Asset Value might narrow, or completely close, the highlighted gap.

Regarding the portfolio characteristics, the bigger part of it seems good enough - the assets qualified for "AAA" rating are 9.88%. My concern is for these "Not Rated" investments, which of course does not necessarily mean that they would be attributed a low credit rating.

Well diversified portfolio with 21.50% participation in tax obligation/limited sector. You may consider as an advantage that 100% of the issuers are located in the United States.

Source: CEFConnect.com, Nuveen Muni High Inc Opp

Source: CEFConnect.com, Nuveen Muni High Inc Opp

Conclusion

Municipal Bond closed-end funds seem beaten up, shaken by dividend cuts - which are a healthy necessity most of the time - and full, or perhaps not as much by now, of investors who are scared of the rising interest rate environment. And there is a good reason to consider restructuring your portfolio in accordance with the bigger picture. However, in our view the selling might have gone too far and there are candidates from this sector for a mean reversion trade, at the very least.

Based on the data that I have reviewed, EVN and NMZ can be potential additions to your portfolio.

Disclosure: I am/we are long NMZ.

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.