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BBN: Muni CEFs Not Immune To Risk-Off Sentiment


  • The last few days of the trading week saw a sharp underperformance in muni CEFs.
  • While we don't know the exact source of this price performance, we suspect it has to do with a rebalancing towards weaker CEF sectors.
  • We find the taxable muni sector attractive on a number of valuation metrics.
  • Within the sector, we particularly like BBN for its attractive yield, coverage and historic returns.
  • This idea was discussed in more depth with members of my private investing community, Systematic Income. Get started today »

Moves across CEF sectors have been fast, brutal and somewhat counter-intuitive. Despite boasting positive and best NAV performance over the week, the taxable muni sector has seen its discount widen the most. In our view, the sector offers good value for both tactical and strategic reasons. We particularly like the BlackRock Taxable Municipal Bond Trust (NYSE:BBN) in the sector for its discount valuation, strong historic returns and solid coverage.

Benchmarking The Moves In Discounts

In the chart below we plot how the CEF sector discounts have moved over the previous week, highlighting the tax-free and taxable muni CEF sectors. For each sector, we baseline the discount at zero as of the previous Friday and plot the cumulative changes in discount through this past Friday close. The legend in the chart except for the 2 highlighted municipal sectors is sorted in order of the discount move.

What the chart shows is that apart from the utilities sector which has seen its discount tighten, all the sector discounts have widened. The range of widening has been between zero and nearly 10%. Interestingly, the sectors taking the most beating such as MLPs and equity sectors have not seen the largest discount widening. Instead, higher-quality fixed-income sectors like munis, limited duration, and preferreds have seen the greatest widening of their discounts.

Source: ADS Analytics LLC, Tiingo

This dynamic, while counter-intuitive, is actually not all that unusual. The explanation may lie in tactical and strategic rebalancing. The sectors that have performed the worst in overall price terms may offer the most attractive tactical opportunities for investors who believe that the sell-off is overdone and who expect a V-shape market recovery. Unless they have spare cash, however, those investors are going to dump the sectors that have held up the best in price terms to reallocate to sectors that have performed the worst. In

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This article was written by

ADS Analytics profile picture

ADS Analytics is a team of analysts with experience in research and trading departments at several industry-leading global investment banks. They focus on generating income ideas from a range of security types including: CEFs, ETFs and mutual funds, BDCs as well as individual preferred stocks and baby bonds.

ADS Analytics runs the investing group Learn more.

Analyst’s Disclosure: I am/we are long BBN. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (9)

gnwilliams profile picture
Re CEFConnect, I too found it inaccurate or not up to date during trading 3/25/20. PCK was up around 7.82 in the market, but 7.26 or so on CEFConnect. Hope they get this straightened out soon.
ADS Analytics profile picture
It can take up to a day for the NAV to feed to CEFConnect. We are a bit more nimble on the service, though making it available a few hours after the close.
@notupset Thanks for your explanation. I am just amazed at the dramatic plunge of both taxable and tax free muni CEF's. Do you have any additional thoughts on what is going on here since your post of March 2nd?
what happens to BBN if inflation ticks up and the fed has to raise?
ADS Analytics profile picture
It will probably fall in price. You do have to probability-weight the different outcomes though and consider other reasons for the allocation rather than just what could happen to inflation.
notupset profile picture
There is an important aspect of the taxable muni sector that is at play here that is different than the tax exempt sector. Most bonds in this fund are spread off the 10 year or the 30 year. These are noncallable benchmarks that are volatile in volatile markets, especially when compared to the AAA MMD scale that is used to spread tax exempts. In the risk off mode the market is currently in and with the huge run in treasuries, taxable muni bonds yields have widened pretty dramatically to treasuries. But even with this widening, the actual dollar prices, on which the NAVs are based, has actually been somewhat stable, because the benchmark is trading so much higher. A large chunk of institutional investors do some kind of hedging of their taxable muni positions. For them this move has been somewhat painful. The same would be true for anyone hedging their taxable muni bond CEF positions. The last big stock market swoon ended up dramatically affecting taxable and tax exempt muni prices to the downside. There was a liquidity crunch. Things are much less risky in that regard now, but insofar as people are looking to raise some cash in things that have gone down less than stocks, even with the downdraft in this fund, it still seems like an ok sell if the big upside in stocks is the opportunity. And if folks want to sell a lot of BBN, as we know, the bid side will just keep fading on us until we are done selling. There aren't tons of people out there poised to buy lots of BBN when the price plunges. That being said I think the fund looks like a buy. It might go down more before it rallies and stays back where it was, but I will be shocked if it isn't a lot higher very soon. Both short and long term treasury yields are likely to stay low for a while and corporate and muni spreads, for decent quality securities, will head back toward their norms in the near future.
Thank you for the analysis. As a holder of both BBN and GBAB, I was wondering about the deep drop in their share price on Friday. KNG
notupset profile picture
I really like GBAB. The holdings in the fund are solid. It is going to be volatile as can be, but at 7% yield it seems like a real buy right now.
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