Weekly Municipal Bond CEF Trades

|
Includes: MUB, NBW, NRK, PML
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.

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 Review' series and it would only be appropriate to complement these articles with a follow-up, like this one, whose goal is to highlight the funds of interest to us.

Statistical Comparison And Potential Trades

Аlthough the price of the iShares National AMT-Free Muni Bond ETF (MUB) finished with a slight decrease on a weekly basis, we were observing an interesting performance and increased trading volume. Definitely, the behavior of the benchmark was supported by the slip of the Treasury yields. It came after ten-year U.S. Treasury yields posted their largest one-day drop since June 2016 on Tuesday, as the political troubles in Italy fueled a flight to safe-haven assets.

Source: Barchart.com - iShares National AMT-Free Muni Bond ETF

The prices in the sector have bounced from their bottoms, but the environment is still severe. Most of the market participant expect at least three increases of the interest rates till the end of the year. All combining to form a landscape that it is a challenge to find statistically justified "Sell" candidates among the funds from the sector. In this sense, we have many opportunities to find potential "Buy" candidates for a review. From a long-term perspective, the period seems favorable for expansion of your portfolio.

The slight recovery from the last two months significantly decreased many of the discounts and respectively part of the statistical edge has vanished. Yes, maybe it is getting a little bit more difficult from a statistical perspective to choose a trade, but still have plenty of candidates which deserves attention and our Weekly Review article has already proved that. As usual, my review is comprised of two potential "Buys", which caught my eye. Additionally, I am going to include a "Sell" candidate, which can be used as a hedging reaction, at least.

The first CEF that I am interested in the Neuberger Berman California Intermediate Municipal Fund (NBW). The fund does not offer one of the highest returns in the sector, but it caught my eye with its combination of the discount and the statistical edge. Currently, we have only five funds from the sector with a lower Z-score. The metric indicates that the discount deviates 2 times from its mean for a one-year period.

Source: CEFConnect.com, Neuberger Berman California Intermediate Municipal Fund

Source: CEFConnect.com, Neuberger Berman California Intermediate Municipal Fund

The current monthly dividend is $0.0448 per common share. The average daily volume of 20,000 shares cannot be considered as an advantage, but even so, I think the fund deserves to be reviewed. The CEF provides us with a good quality of assets and there should not be much to worry about. The main part of the investments is labeled as "AA" rating. Furthermore, 97.58% of the investments of the fund are by issuers located in the United States.

Source: CEFConnect.com, Neuberger Berman California Intermediate Municipal Fund

Source: CEFConnect.com, Neuberger Berman California Intermediate Municipal Fund

From a technical perspective, the fund entered into a price range and we find a support level around $12.50. Something interesting for me is to see how the price fluctuation can be explained by the main index for municipal bond closed-end funds, the iShares National Muni Bond ETF. The pure statistics is an important part of my analysis:

Source: Barchart.com, Neuberger Berman California Intermediate Municipal Fund

Source: Author's software

The second participant is Nuveen New York AMT-Free Municipal Income Fund (NRK). Fundamentally and statistically, the fund deserves to be included to our potential "Buy" candidates list. The quality of the portfolio was the main factor to review it. Additionally, this closed-end fund has a relatively high average volume of 137,000 shares per day.

Source: Barchart.com, Nuveen New York AMT-Free Municipal Income Fund

Source: Barchart.com, Nuveen New York AMT-Free Municipal Income Fund

The quality of the assets is really impressive. The main distribution is between "AAA" and "AA" ratings. The assets in the portfolio from issuers located in the United States are 95%.

Source: Barchart.com, Nuveen New York AMT-Free Municipal Income Fund

Source: Barchart.com, Nuveen New York AMT-Free Municipal Income Fund

Finally, we have an option to form a pair trade by including to our review a potential "Short" candidate. As we saw from the Weekly Review article, PIMCO Municipal Income Fund II (PML) is the only fund traded at a premium which has a statistical edge.

Source: Barchart.com, PIMCO Municipal Income Fund II

Source: Barchart.com, PIMCO Municipal Income Fund II

Source: Author's software

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. 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, NBW and NRK can be potential "Long" additions to your portfolio. As a hedging reaction, you may decide to use PML.

Note: This article was originally published for our subscribers on 6/3/2018 and some figures and charts may not be entirely up to date.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NRK, NBW over the next 72 hours.

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.