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Leveraged CEFs and Munis
Old 12-06-2010, 04:36 PM   #1
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Leveraged CEFs and Munis

Am thinking of adding closed ended leveraged funds such as munis to my taxable portfolio. Couple of concerns given low interest rates, basically the timing of such a purchase. More generally with leveraged CEFs, as I basically understand, as long as yield slope remains positive, the leverage should not be problematic. So even if short term rates go up, if long term also go up or slope remains positive should be okay with respect to leverage? Any thoughts from those with experience in this area?
Thanks.

Bob
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Old 12-06-2010, 05:13 PM   #2
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If short rates go up, you get spanked by the cost of the leverage increasing, but as long as longer term rates do not rise the value of the bonds and NAV should hold up. If short and long term rates rise, you get spanked as above plus the value of your bonds and NAV take a nose dive.

Naturally, it pays to look closely into any fund you buy. Most CEF managers will tell you the effective duration of the fund. Much above 5 or 6 and you really need a strong stomach.

I buy (and sell) CEFs. I usually look for an asset class I want to own in a fund selling at a fat discount to NAV (high single digits or better) and a max expense ratio of 1%. I sell when the discount narrows appreciably or I am no longer bullish on the underlying assets.
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Old 12-06-2010, 05:19 PM   #3
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Quote:
Originally Posted by brewer12345 View Post

I buy (and sell) CEFs. I usually look for an asset class I want to own in a fund selling at a fat discount to NAV (high single digits or better) and a max expense ratio of 1%. I sell when the discount narrows appreciably or I am no longer bullish on the underlying assets.
Anything worth looking at right now?
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Old 12-06-2010, 07:49 PM   #4
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JQC, BKT and all of a sudden ACG look attractive.
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Old 12-08-2010, 02:57 PM   #5
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Greetings. The majority of my investment allocation for the past two yrs has been in leveraged CEFs and, in particular, in muni funds. It's been a decent run but imo the danger of the rate environment henceforth - both short rates for the leverage costs and long rates for the yield/spread risk - since the summer made me shift out of leveraged CEFs into non-levered funds.

Your post is clearly timely right now as the muni mkt has been caught in a perfect storm of technical and fundamental factors. Global public finance issues (i.e. Ireland, Greece, etc), the Republican wins in the mid-term elections (i.e. tax rate effects, BAB bond effects, etc.), QE2 rejection by bond mkt, muni supply factors (i.e. large Cal and Illinois deals, imminent deals due to question of BABs, etc.), bullish technical support in stocks (buy stocks, sell bonds), yr-end tax trades, etc etc etc have caused extreme bearish volatility since the beginning of Fall. I have been adding to positions in intermediate non-levered muni funds during the current sell-off - however, I believe that technical factors may continue to pressure the market in the near term especially until there is resolution in the BAB program.

So the theme for me in the past 6 months has been to ease out of levered funds and kept in cash - got as high as 50% cash - and in the past few days I have added to intermediate national muni funds and to my position in DVY since I would like to gradually build to my equity allocation from hereon as well.

Finally, if you have an IRA I would suggest taking a look at BAB bonds for that portfolio since you are already interested in munis for your taxable portfolio - there are technical and fundamental risks to those bonds obviously. However, imo, BAB bonds are an incredibly great long-term deal for non-taxable accts given the double-dip from the federal yield subsidy if one is already comfortable with holding munis.

Good luck.
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Old 12-09-2010, 01:29 PM   #6
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Finally, if you have an IRA I would suggest taking a look at BAB bonds for that portfolio since you are already interested in munis for your taxable portfolio - there are technical and fundamental risks to those bonds obviously. However, imo, BAB bonds are an incredibly great long-term deal for non-taxable accts given the double-dip from the federal yield subsidy if one is already comfortable with holding munis.

Good luck.
what are "BAB bonds"?
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Old 12-09-2010, 06:44 PM   #7
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what are "BAB bonds"?
Build America Bonds - Wikipedia, the free encyclopedia
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