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Muni Bond CEFs
Old 06-03-2013, 07:00 PM   #1
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Muni Bond CEFs

Muni bond CEFs have been getting hammered lately. And discounts to NAV are among some of the highest ever seen for some of these funds (with the exception of the 2008-2009 meltdown). Yields of 6% + - tax free - for bond durations of less than 6 years sure is tempting.

Anybody picking up some of these shares? How about you - Brewer - this seems to be an area of expertise for you. Are the valuations yet where you would interested?
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Old 06-03-2013, 07:22 PM   #2
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I noticed the same thing today in my regular CEF discount screen. The discounts are at a level that interests me, but I am leery of jumping on the pool. The problem is that the big discounts are on funds that are pretty generously leveraged (they borrow money at short term rates to buy more long term bonds). The assets may be of 6 year duration, but what is the effective duration of the equity of the fund (what you would be buying) with the borroed money?
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Old 06-03-2013, 09:06 PM   #3
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I guess I did not consider that. But its an excellent point. Most funds list their average duration at cefconnect.com (those that don't I simply ignore from that point on), and their effective leverage. So I assume that duration x effective leverage = effective duration?

I owned LEO years ago. Made a nice profit on it. (Its duration is longer than the 6 years I mentioned earlier. Its average duration is 9.61, with effective leverage of 33.58%) Its trading at $8.60 today. There are only a few -very short -periods where its price/share was less than $8. All the way back to 1987...so the track record is quite long.

Seems like it might be a reasonable risk/reward bet in this 1.7% short-term bond environment...
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Old 06-03-2013, 09:28 PM   #4
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You might be right and there might be money to be made. OTOH, going back to 1987 what is the last time 10 year treasury rates were in the ballpark of 2%?
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Old 06-04-2013, 07:20 AM   #5
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Taxable bond CEF funds are also taking their hits.

Part of it is NAV, but the discounts are also widening. Early Monday evening I copied a screen of 150+ funds over to a spreadsheet. Values were reported as of Friday's close. 68% were showing a discount to NAV, with an average discount of 2.8%.

Re-running the numbers based on Monday's close, the discount widened a full point to 3.8%. Now 76% of the funds are trading at a discount.

Even discounting for some lags in NAV reporting, there is a trend. As happens from time to time, some CEF investors are heading for the exits. There will be bargains available if this continues.

Is anyone aware of screening tool that would allow similar evaluation of discount changes on a category or basket of CEFs over a longer period?
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