Weekly Review: Municipal Bond CEFs - Another Positive Week For The Sector

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

A new positive performance for the municipal bond CEFs as the iShares National AMT-Free Muni Bond ETF (MUB) reported a gain of $0.22 on a weekly basis. The situation in the sector seems favorable as the interest rate panic did not concern the market participants anymore. On the other hand, the sell-off in the riskier assets was additional stimulus for the investors to move a part of their investments to safer assets.

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

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 (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

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 narrowing spread and 3-month LIBOR are important for the leveraged municipal funds, and they can be highly affected by them. The 3-month LIBOR rate is a commonly used funding benchmark for the municipal bond CEFs.

Chart 3-Month LIBOR based on US Dollar data by YCharts

Source: YCharts.com, 10-2 Year Treasury Yield Spread and 3-Month LIBOR based on US Dollar

The News

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

Eaton Vance Management announced the results of the special meeting of the shareholders where several mergers were approved.

Acquired Fund (Trading Symbol) Acquiring Fund (Trading Symbol)
Eaton Vance New York Municipal Bond Fund II (NYH) Eaton Vance New York Municipal Bond Fund (ENX)
Eaton Vance California Municipal Bond Fund II (EIA) Eaton Vance California Municipal Bond Fund (EVM)
Eaton Vance Massachusetts Municipal Bond Fund (MAB) Eaton Vance Municipal Bond Fund (EIM)
Eaton Vance Michigan Municipal Bond Fund (MIW) Eaton Vance Municipal Bond Fund (EIM)
Eaton Vance Michigan Municipal Income Trust (EMI) Eaton Vance Municipal Income Trust (EVN)

Each merger is currently expected to be completed as of the close of business of the New York Stock Exchange on or about December 14, 2018

Weekly Charts

1. Funds traded at discount and Z-score less than -2.00 points

Source: CEFConnect.com

2. Funds traded at discount and yield on NAV above 5.20%

Source: CEFConnect.com

3. Biggest price decrease

Source: CEFConnect.com

4. Biggest price increase

Source: CEFConnect.com

Review Of Municipal Bond CEFs

1. Lowest Z-Score

Source: CEFConnect.com

Our weekly review is starting with the closed-end funds sorted by their lowest Z-score. The main aim here is to show us which of the funds are statistically undervalued at the moment. Ideally, to find a reasonable "Long" candidate, we would like to have a statistical edge accompanied by an attractive discount.

On a weekly basis, we notice a slight decrease in the Z-scores of the funds. Invesco Quality Municipal Income Trust (IQI) is leading the chart after a week when its price fell by 1.33%, but its net asset value remained in the green territory. I think the recent dividend decrease is still а burden for the performance of the fund but the statistical edge here indicates that we can review this fund as a potential "Buy" candidate. Also, I saw several times a serious buyer who participated in the market and it will be nice to catch this trend.

Source: Barchart.com

2. Highest Z-Score

Source: CEFConnect.com

Last time we discussed how the news around the share repurchase program of BlackRock reflected on several of their Munis. I presented you one pair trade opportunity and a part of it was to be "Short" on BlackRock MuniYield Fund (MYD). A week ago, the funds had 1.00 point Z-score and there was not a logical reason behind that move. So, seven days later the price of the fund is falling by 2.74% on a weekly basis. This trade was a very good example of how Z-score helps us to find potential trades on the market.

Source: CEFConnect.com

The average one-year Z-score in the sector is -1.17 points. The last time, the average Z-score of the municipal sector was -0.90 points.

3. Biggest Discount

Source: CEFConnect.com

Another important characteristic is the spread between the price and the net asset value of the funds. As we see, many of the funds are traded far below their NAVs and eight of them have a spread of more than 16.00%.

Neuberger Berman New York Intermediate Municipal Fund (NBO) is sitting on the first position with a discount of 16.65% and a Z-score of -1.50 points. Good statistical parameters but I will restrain myself from trading it just because it has a relatively low average daily volume. For my active trading style, the low liquidity is always related to liquidity risk. Anyway if you are a long-term-oriented investor, these funds may catch your attention.

4. Highest Premium

Source: CEFConnect.com

In the above table are the funds which are trading above their net asset values. Theoretically, the participants should be reviewed as potential "Sell" candidates, but you need to be careful with PIMCO funds. The market pays a premium for them on a regular basis. Additionally, when the Z-score is between 0 and 1.00 point, we do not have a statistical reason to sell any of these funds.

The average discount/premium of the sector is -11.06%. Last time, the average spread between the prices and net asset values of the funds was -10.42%. This number comes to prove that the period provides many opportunities to buy funds at a significant discount.

Source: CEFConnect.com

5. Highest 5-year Annualized Return On NAV

Source: CEFConnect.com

The above sample shows the funds which outperformed their peers. The average return on net asset value for the past five years for the sector is 5.72%. Me personally I continue to follow the performance of Pimco California Municipal Income Fund II (PCK) and expect some positive impulse in the price of the fund.

6. Highest Distribution Rate:

Source: CEFConnect.com

The average yield on price is 5.00%, and the average yield on net asset value is 4.45%. Usually, PIMCO funds are the ones which dominate in this chart and it is not a frequent occasion to see some other funds to take the leading positions.

Pioneer Municipal High Income Advantage Trust (MAV) and BlackRock Long-Term Municipal Advantage Trust (BTA) offer one of the highest yields in the sector and I think they can be very good candidates for your portfolio.

Source: CEFConnect.com, Pioneer Municipal High Income Advantage Trust

Source: CEFConnect.com, BlackRock Long-Term Municipal Advantage Trust

7. Lowest Effective Leverage %

Source: CEFConnect.com

From a leverage perspective, we have seven closed-end funds whose effective leverage is equal to zero. The average effective leverage of the sector is 36.4%. Do not underestimate the effect of the leverage, especially in such a market environment.


The price of the iShares National AMT-Free Muni Bond ETF is still suffering from the rising Treasury yields and the future expectations. Definitely, the change of the 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 on Nov. 25. 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 PCK 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.