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Time To Buy Muni Bond CEFs At Deep Discounts?

Apr. 13, 2018 5:31 AM ETXMPT10 Comments
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Municipal bond closed-end funds (CEFs) are currently trading at discounts (market price below net asset value) not seen since the depths of the financial crisis back in 2008 (which pre-dates the inception of the fund displayed in the chart below). We feel this may present an attractive buying opportunity for investors.

Premium/Discount: CEFs Held by VanEck Vectors CEF Municipal Income ETF (XMPT)

Source: VanEck. Data as of 4/9/2018. Past performance is not indicative of future results.

Dividend Cuts and Rising Rates

Among the various reasons behind these discounts are dividend cuts, which are mostly attributable to rising U.S. short-term interest rates. Many of the larger muni closed-end funds have cut their dividend over the past few months, with the majority having done so at the end of 2017. These cuts have ranged anywhere from 1% to 16%, with the average at approximately 11%.

Higher short-term rates have increased the borrowing costs for leveraged funds. As a result, the spread (long-term bond income minus the cost of short-term borrowings) made on the leveraged assets has decreased. Along with lackluster performance, discounts appear to have widened further as the marketplace became aware of the dividend cuts. This led to further selling, adding to the downward pressure on prices.

The Fed is expected to continue to hike the Fed funds interest rate over the course of 2018. Beyond short-term rate increases, rising long-term rates can also hurt asset values, and fears of long-term rates going higher in the near term may also deter investors.

A Buying Opportunity?

While in the near term discounts may widen a bit further, we encourage investors to monitor the space closely and consider current levels in what may be a potential buying opportunity. The current discounts of CEFs may offset to some degree the impact of any potential dividend cuts. In

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VanEck’s mission is to offer investors intelligently designed investment strategies that capitalize on targeted market opportunities. VanEck seeks to provide long-term competitive performance through active and index strategies based on creative investment approaches and portfolio delivery.At VanEck we are driven by innovation, our hallmark since the company’s founding in 1955. Our efficiently-constructed investment strategies benefit from our experience and in-depth knowledge of targeted asset classes. Our actively managed VanEck Funds target natural resource equities and commodities, emerging market equities, global fixed income, and liquid alternatives. Security selection is the cornerstone of our approach to managing these funds. Our index-based VanEck Vectors ETFs are purpose-built, aimed at either providing exposure to asset classes that are underrepresented in investor portfolios or offering a superior approach to established investment categories. We offer unique, actively managed investment portfolios in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Headquartered in New York City, we have a network of offices worldwide, including offices in Sydney (Australia), Shanghai (China), Frankfurt (Germany), Madrid (Spain), and Pfaeffikon (Switzerland).Disclosure: http://www.vaneck.com/seeking-alpha-terms-and-conditions/

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