3 ms·

fixed income. muni CEFs are trading at a 10% discount to NAV. overall fixed income is under pressure due to fear of rising interest rates and fed tapering, so f

by gfodor 13y ago

fixed income. muni CEFs are trading at a 10% discount to NAV. overall fixed income is under pressure due to fear of rising interest rates and fed tapering, so future interest rate hikes are partially priced in both in NAV terms and in discount. if you don't have any plans on selling your bonds (and hence, don't really care about the day-to-day price fluctuations of bond funds) and just want an income stream you could do worse than loading up on discounted, diversified CEFs that pass the smell test of being able to sustain their distribution. the main risk here is inflation risk. if inflation in the country takes off your 5% yielding (likely 30% leveraged) bond fund is going to start to see its real return get eaten away quickly. the alternatives are equities though. and right now the stock market is pretty scary to me.

mjn 13y ago
I'm no bond expert, but aren't munis discounted in part due to default worries? There's a fear that a second wave of municipalities that survived the first wave of post-crisis bankruptcies may still succumb, since many avoided default by doing miscellaneous stop-gap and accounting tricks that may not be repeatable. Hence a risk premium.
- gfodor 13y ago
  Yes this is likely part of the reason but in general the discount arose due to the fed tapering issue since the discounts on all fixed income have widened together since. Regardless, a particular muni fund will be exposed to thousands of municipalities, so default risk is essentially diversified away, particularly if you invest in a managed fund where the fund managers have a track record of understanding the municipalities they invest in. Unless you are a devout believer in the efficient market, one could argue that the discount could in part be due to irrational investors selling their munis to buy equities in a media environment where scary headlines about Detroit going bankrupt are on CNN and Facebook stock doubles since it's IPO.
- thatthatis 13y ago
  Those factors can account for a decrease in the asset price, but not for a 10% discount to the going asset price by buying through a closed end fund.

by gfodor 13y ago

mjn 13y ago

I'm no bond expert, but aren't munis discounted in part due to default worries? There's a fear that a second wave of municipalities that survived the first wave of post-crisis bankruptcies may still succumb, since many avoided default by doing miscellaneous stop-gap and accounting tricks that may not be repeatable. Hence a risk premium.

gfodor 13y ago
Yes this is likely part of the reason but in general the discount arose due to the fed tapering issue since the discounts on all fixed income have widened together since. Regardless, a particular muni fund will be exposed to thousands of municipalities, so default risk is essentially diversified away, particularly if you invest in a managed fund where the fund managers have a track record of understanding the municipalities they invest in. Unless you are a devout believer in the efficient market, one could argue that the discount could in part be due to irrational investors selling their munis to buy equities in a media environment where scary headlines about Detroit going bankrupt are on CNN and Facebook stock doubles since it's IPO.
thatthatis 13y ago
Those factors can account for a decrease in the asset price, but not for a 10% discount to the going asset price by buying through a closed end fund.