Weekly Review: Municipal Bond CEFs

by: Arbitrage Trader

Review of where municipal closed-end funds and their benchmark ended the week.

Comparison of the yields and Municipal/Treasury spread ratio.

Recap of news related to the sector.

Comparison among the funds using several important metrics.


Over the past few months, most of you have noticed our increased activity in closed-end funds as the inflow of volatility finally shook them up and created various arbitrage, and directional, opportunities for active traders like us.

Now that these products have grabbed our attention, we are continuously monitoring most funds by sector and will reinstate our Weekly Review, publishing a recap of the groups of interest.

The Benchmark

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

The price of the iShares National AMT-Free Muni Bond ETF (NYSEARCA:MUB) follows the trend and increased by $0.26 on a weekly basis. The main benchmark continues to show us a positive performance week after week and currently, it trades at one of the highest levels for 2018.

At the moment, the 10-year Treasury yield is not in a dangerous zone which could affect the municipal sector. As we see, it stays farаway from the psychological level of 3%. Over the past week, yield inched lower after President Donald Trump's administration sparked a new wave of international trade fears upon announcing a new list of new Chinese tariffs.

Source: CNBC.com, US 10-Year yields

As you know, we follow the performance of the U.S. Treasury bonds - considering them a risk-free product - with maturities greater than 20 years: the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT). The reason for that is the strong correlation between these major indices, and the chart below proves it. Additionally, a statistical comparison is provided by our database software:

Source: Barchart.com - iShares 20+ Year Treasury Bond ETF

Source: Author's software

Source: Author's software

Comparison Of The Yields And Municipal/Treasury Spread Ratio

Investing in municipal bonds is popular because they have the potential to offer higher yields than similar taxable bonds. If an investor wants to know whether muni bonds are cheap in comparison to taxable bonds or Treasuries, they could find out by comparing them. However, this method does have its limitations, and the investor should perform a more thorough analysis before making a decision:

Source: Bloomberg.com, Municipal and Treasury Yields

Source: Bloomberg.com, Municipal and Treasury Yields

The Municipal/Treasury spread ratio, or M/T ratio as it is more commonly known, is a comparison of the current yield of municipal bonds to U.S. Treasuries. It aims to ascertain whether or not municipal bonds are an attractive buy in comparison. Essentially, an M/T ratio north of 1 means that investors receive the tax benefit of muni bonds for free, making them even more attractive for high net worth investors with higher tax rate considerations.

Source: Bloomberg.com, Municipal and Treasury Yields

The News

Source: Yahoo News, Municipal Bond Closed-End Funds News

Over the past week, Federated Premier Municipal Income Fund (NYSE:FMN) has declared a dividend of $0.0540. The Payable Date is Aug 1, 2018. The fund decreased its distribution rate in July.

Source: CEFConnect.com, Federated Premier Municipal Income Fund

Review Of Municipal Bond CEFs

1. Lowest Z-Score

Source: CEFConnect.com

Above are the closed-end funds sorted by their lowest Z-score. The purpose of the indicator is to show us which of the funds are statistically undervalued at the moment. Compared to the previous time, we notice a slight increase in the values of the metric, but we still have several funds with a Z-score less than -2.00 points. This could be easily explained by the recent uptick of the sector.

BlackRock Municipal Income Investment QualityTrust (NYSE:BAF) is one option which you may decide to review. A discount of 10% and a Z-score of -2.20 makes it potential "Buy" candidate. As a reason, I can point out the recent dividend cut. The NAV stays flat and the UNII balance per share is positive, so I think the fund deserves our attention.

Source: CEFConnect.com, BlackRock Municipal Income Investment QualityTrust

2. Highest Z-Score

Source: CEFConnect.com

Here, sorting the funds by the highest Z-score in order to find "Sell" candidates. When the Z-score is between 0 and 1, we do not have a statistical reason to sell any of these funds.

The Managed Duration Investment Grade Municipal Fund (NYSE:MZF) has the needed statistical edge, but it's trading at a discount. Therefore, I am going to restrict myself from discussing it.

Last time, the Z-score of the PIMCO Municipal Income Fund II (NYSE:PML) was 1.70 points. Checking the chart below, we notice that the recent decrease of the price seems like a technical correction of the trend. Currently, we do not expect PIMCO to cut the dividend of that fund.

Source: CEFConnect.com, PIMCO California Municipal Income Fund

3. Biggest Discount

Source: CEFConnect.com

Most of the funds above have the needed fundamental and statistical quality to be reviewed as potential "Longs". It may be worth to spend some time on a deeper analysis of them and to consider if they deserve to be part of our portfolio.

Eaton Vance New Jersey Municipal Income Trust (NYSEMKT:EVJ) really caught my attention with its discount of more than 17%. Furthermore, its NAV is increasing and its distribution rate remains stable.

Source: CEFConnect.com, Eaton Vance New Jersey Municipal Income Trust

Source: CEFConnect.com, Eaton Vance New Jersey Municipal Income Trust

4. Highest Premium

Source: CEFConnect.com

Above is the sample where we will be searching for overpriced funds in order to see if some of the closed-end funds will surprise us with a "Short" opportunity. To conclude that some CEF is a potential "Sell," I would like to find a fundamental and a statistical reason to establish a position. Currently, only PIMCO California Municipal Income Fund (NYSE:PCQ) has some statistical edge, but we need to find a fundamental reason to be short here. The best way is if you are able to catch the moment of before the dividend cut.

5. Highest 5-year Annualized Return On NAV

Source: CEFConnect.com

The above sample shows the funds with the highest return on net asset value for the last 5 years. The Eaton Vance Municipal Income Trust (NYSE:EVN) is leading the chart, and despite the fact that it has lost its statistical edge, you still can review it as potential "Buy" candidate.

6. Lowest 5-year Annualized Return On NAV

Source: CEFConnect.com

On the other side of the coin are the closed-end funds with the lowest return on net asset value for the past five years. Nevertheless, you can find "Buy" candidates here. Some of these participants have a better portfolio quality compared to the funds with the highest return in the sector.

Source: CEFConnect.com, Nuveen New York Municipal Value Fund 2

7. Highest Distribution Rate:

Source: CEFConnect.com

If you are wondering which of the funds have the highest distribution rate on price, the above sample can help you to find the answer. Additionally, I have plotted here the distribution rate based on the net asset value. Most of the market participants find the second metric as the more important one.

8. Lowest Effective Leverage %

Source: CEFConnect.com

From a leverage perspective, we have six closed-end funds which are non-leveraged. Do not underestimate the effect of the leverage, and be sure it is included in your analysis. Closed-end funds create leverage by borrowing at short-term rates, then using the money to invest in strategies or instruments providing longer-term returns. The intent is to create a positive difference between the longer-term return and the short-term cost of borrowing. A positive difference between the two means additional income or return is available to help increase fund common share distributions. If the difference is negative, leverage may hurt the NAV return and distributions paid to common shareholders.


The iShares National AMT-Free Muni Bond ETF continues to recover its price over the past two months. The global trade concerns gave a positive impulse for most of the fixed income sectors, but we should not forget that we are in the rising rates environment. Definitely, the change in interest rates will play a role, and we should anticipate a reflection on the muni sector as well. Compared to the previous year, the discounts of the closed-end funds holding such products have significantly widened. While I find this to be fundamentally justified, I always expect some buying impulse to give us at least a mean-reversion trade in these products.

Note: This article was originally published for our subscribers on 7/15/2018, 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 BAF 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.