{"id":23532,"date":"2023-10-01T00:37:48","date_gmt":"2023-10-01T00:37:48","guid":{"rendered":"https:\/\/microloannexus.com\/investing\/closed-end-muni-funds-now-trade-at-biggest-discount-in-18-years\/"},"modified":"2023-10-01T00:37:49","modified_gmt":"2023-10-01T00:37:49","slug":"closed-end-muni-funds-now-trade-at-biggest-discount-in-18-years","status":"publish","type":"post","link":"https:\/\/microloannexus.com\/?p=23532","title":{"rendered":"Closed-End Muni Funds Now Trade at Biggest Discount in 18 Years"},"content":{"rendered":"
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\n
<\/div>
\n

Muni closed-end funds have been hard hit because they have experienced a triple whammy.<\/h4>\n


\n Dreamstime
\n <\/span>
\n <\/figcaption><\/figure>\n<\/p><\/div>\n

Closed-end municipal bond funds have been hammered during the recent selloff in fixed-income markets and now trade at the widest discounts to their asset value in the past 18 years.<\/p>\n

Big funds\u2014such as the $2.8 billion
\n Nuveen AMT-Free Quality Municipal Income Fund
\n (ticker: NEA), at around $9.66, and
\n Nuveen AMT-Free Municipal Credit Income Fund
\n (NVG), at about $10.35\u2014are trading at 16% to 17% discounts to net asset value. <\/p>\n

\n

Over the past year, the average muni closed-end fund discount has been closer to 10% and the long-term average is around 5%.<\/p>\n

The Nuveen AMT-Free Quality Municipal Income Fund yields 4.3% while the Nuveen AMT-Free Municipal Credit Income Fund, which has a sizable chunk of its assets in bonds with lower credit ratings or none at all, yields 5%. The average muni closed-end fund yields almost 5%.<\/p>\n

A 5% rate on munis is equivalent to a yield of about 7.7% on a taxable bond for an individual in a 35% federal tax bracket\u2014not factoring state taxes, which can lift the taxable-equivalent yield to over 8%. That is close to the average yield on junk bonds.<\/p>\n

\u201cLong-term rates have moved up and it\u2019s causing investors to panic out of long-duration assets,\u201d says Eric Boughton, a portfolio manager at Matisse Capital. \u2018It\u2019s a huge opportunity in muni closed-end funds.\u00a0<\/p>\n

His firm runs the
\n Matisse Discounted Bond CEF Strategy
\n (MDFIX), an open-end fund that buys discounted fixed-income closed-end funds.\u00a0<\/p>\n

The fund now has about a 50% weighting in muni funds, double its normal allocation. Its largest muni closed-end fund holdings include the
\n Abrdn National Municipal Income Fund
\n (VFL) and
\n Nuveen Municipal Credit Income Fund
\n (NZF). Four of its five largest muni holdings have discounts of 16% or more.<\/p>\n

One muni closed-end fund that is worth a closer look by investors is the
\n BlackRock Municipal 2030 Target Term Trust
\n (BTT), trading around $19.30 with a 13% discount to net asset value.\u00a0<\/p>\n

While its dividend yield is relatively low at 3.5%, it aims to return $25 a share to investors in 2030. If that happens\u2014or if the payback is even close to $25\u2014investors could earn a 7% annualized return, Barron\u2019s<\/em> estimates. Most muni closed-end funds have no wind-up date.\u00a0<\/p>\n

\n

<\/p>\n

\n
\n\n\n\n\n\n\n
Fund \/ Ticker<\/th>\nRecent Price<\/th>\nDiscount to NAV<\/th>\nCurrent Yield<\/th>\nSize (bil)<\/th>\nYTD Change<\/th>\n<\/thead>\n
Nuveen AMT-Free Quality Mun i\/ NEA<\/b><\/td>\n$9.63<\/td>\n17.60%<\/td>\n4.30%<\/td>\n$2.90<\/td>\n-13<\/td>\n<\/tr>\n
Nuveen AMT-Free Muni Credit \/ NVG<\/b><\/td>\n10.24<\/td>\n-17.5<\/td>\n5<\/td>\n2.2<\/td>\n-13<\/td>\n<\/tr>\n
BlackRock Municipal 2030 Target Term \/ BTT<\/b><\/td>\n19.33<\/td>\n-14.2<\/td>\n3.5<\/td>\n1.4<\/td>\n-7<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Source: CEF Connect<\/p>\n<\/div><\/div>\n<\/p><\/div>\n

Muni closed-end funds have been hard hit because they have experienced a triple whammy.\u00a0<\/p>\n

The funds tend to own longer-term municipal bonds with maturities of 15 to 20 years, which have been hit by the recent selloff in fixed-income markets. The funds are leveraged, often with about 50 cents of borrowings for every dollar of equity, magnifying losses in a down market.\u00a0<\/p>\n

And sharply higher short-term rates are cutting the rate spreads that the funds earn on the leveraged portion of their assets.\u00a0<\/p>\n

The muni short-term rate benchmark, known as Sifma, has risen to about 4% from near zero in early 2022. With muni bonds yielding in the 4% to 5% range, the benefits from borrowing are largely negated.<\/p>\n

This has contributed to widespread dividend cuts among muni closed-end funds.<\/p>\n

The Nuveen AMT-Free Quality Municipal fund\u2019s dividend, for instance, has fallen by about 40% since early 2022 to an annual rate of 42 cents per share.\u00a0<\/p>\n

One problem for investors in muni closed-end funds is that fees can be ample at around one percentage point. For funds to offer competitive dividends relative to other muni investments such as individual bonds and exchange-traded funds, they often need to trade at discounts to net asset value.\u00a0<\/p>\n

For instance, a Los Angeles airport 5% bond due in 2052 now yields about 5%. That is a nice yield for an AA-rated bond and offers competition for muni closed-end funds.<\/p>\n

It has been difficult for activists to try to turn closed-end funds into open-end funds, which would collapse discounts and benefit investors.<\/p>\n

Still, the wide discounts on muni closed-end funds offer attractive yields and better liquidity than individual munis that are traded in an over-the-counter market. Given their leverage, the funds should appreciate nicely if long-term rates head back down.<\/p>\n

Corrections & Amplifications<\/strong><\/p>\n

A Los Angeles airport 5% bond\u00a0is\u00a0<\/strong>due in 2052.\u00a0An earlier version of this article incorrectly said the bond was due in 2022.<\/p>\n

Write to Andrew Bary at andrew.bary@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Muni closed-end funds have been hard hit because they have experienced a triple whammy. Dreamstime Closed-end municipal bond funds have been hammered during the recent selloff in fixed-income markets and now trade at the widest discounts to their asset value in the past 18 years. Big funds\u2014such as the $2.8 billion Nuveen AMT-Free Quality Municipal<\/p>\n","protected":false},"author":1,"featured_media":23533,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[49],"tags":[],"class_list":{"0":"post-23532","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-investing"},"yoast_head":"\nClosed-End Muni Funds Now Trade at Biggest Discount in 18 Years | Micro Loan Nexus<\/title>\n<meta name=\"description\" content=\"Muni closed-end funds have been hard hit because they have experienced a triple whammy. 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