Muni CEFs

[twaddle]

I need to ratchet my taxable income down a bit, so I've been looking at muni funds. Vanguard can give me a yield of about 4%, but it looks like I can get close to 5% with a discounted CEF.

I found a few that have no leverage, relatively low expenses, and a pretty good discount. All from Nuveen, and they should be pretty good at the muni thing.

Anybody have an opinion on NXP, NXQ, NXR or other muni CEFs? I don't see a lot of downside. Historically, the discount has gotten a bit larger, but not much. Most of the time, it's been pretty small.

Of those 3, I'm leaning towards NXQ for AAA quality and low AMT exposure.

 

[brewer12345]

Look very, very carefully at who the guarantors of the underlying bonds are. The smaller guarantors may well be in trouble and if their ratings get cut the value of the bonds will almost certainly be hurt.

 

[twaddle]

That's why I'm not going with individual munis. NXQ doesn't have more than 4% exposure to any single issue, and they have good diversity.

 

[brewer12345]

Great, but if the are all guaranteed by two little guys who get downgraded, it won't make much difference.

 

[twaddle]

So for the 23% of the fund that is comprised of insured bonds, I should dig into the health of the insurers? I guess that should only be 6 or so bonds. OK, I'll try that for homework.

 

[twaddle]

Nuveen gives me all of the bonds in an Excel format. 135 bonds for NXQ. What's a "JJ Kenny flag?"

 

[RetireeRobert]

Anybody have an opinion on NXP, NXQ, NXR or other muni CEFs? I don't see a lot of downside. Historically, the discount has gotten a bit larger, but not much. Most of the time, it's been pretty small.

Of those 3, I'm leaning towards NXQ for AAA quality and low AMT exposure.

I would agree with you on NXQ of those three. And for the reasons you give.

I found Nuveen over the years head and shoulders above Van Kampen in the muni arena.

I have also been thinking now may be an opportune time to add a bit to my muni pot as discounts to NAV are historically fairly generous currently.

Just shy of 5% tax free is not bad, if one's tax bracket makes taxes a concern/and the AMT. Gives close to 7% tax equivalent yield depending on tax bracket. Not bad.

 

[haha]

So for the 23% of the fund that is comprised of insured bonds, I should dig into the health of the insurers? I guess that should only be 6 or so bonds. OK, I'll try that for homework.

Twaddle, please keep us posted on this.

ha

 

[twaddle]

Of the 135 bonds, 59 are insured:

FSA: 7
FGIC: 12
AMBAC: 10
MBIA: 22
XLCA: 3
RAAI: 4
FHA (UB): 1

Most of these are brand-name insurers, but I have no way to evaluate them. Brew?

 

[RetireeRobert]

Of the 135 bonds, 59 are insured:

FSA: 7
FGIC: 12
AMBAC: 10
MBIA: 22
XLCA: 3
RAAI: 4
FHA (UB): 1

Most of these are brand-name insurers, but I have no way to evaluate them. Brew?

I think you're going to extremes trying to evaluate insurers of part of the portfolio. The first insurance is good bond issuer picking by Nuveen, and their credit analysis of the issuer before even adding bond issues to the portfolio. Nuveen has been in this muni business a long-long time.

To have additional third-party insurer guaranteeing payment of principal and interest is just gravy. The fact this third party insurance is spread among 7 insurers is added protection. The fact the portfolio is diversified among issuers is quadruple protection.

Don't think you need overkill here, in my opinion.

 

[twaddle]

It's mostly an interesting exercise. A few years ago, I would have bought a single-issue insured muni without a second thought.

But now the same guys who insure munis are also on the hook for subprime mortgage insurance and exotic structured credit insurance. These are the days of distressed bond insurers.

And munis are generally considered almost as safe as treasuries, but again these days are different. Municipalities are caught up in the subprime mess as investors. And muni bonds are probably the most illiquid and opaque bonds you can imagine.

So, this seems like a good time to understand to whom you're loaning money.

Someday it may even be a good time to understand the companies you're buying stock from.

But mostly I'm just trying to see if there are any particular gotchas with these CEFs, which have their own set of traps.

 

[RetireeRobert]

It's mostly an interesting exercise. A few years ago, I would have bought a single-issue insured muni without a second thought.

But now the same guys who insure munis are also on the hook for subprime mortgage insurance and exotic structured credit insurance. These are the days of distressed bond insurers.

And munis are generally considered almost as safe as treasuries, but again these days are different. Municipalities are caught up in the subprime mess as investors. And muni bonds are probably the most illiquid and opaque bonds you can imagine.

So, this seems like a good time to understand to whom you're loaning money.

Someday it may even be a good time to understand the companies you're buying stock from.

But mostly I'm just trying to see if there are any particular gotchas with these CEFs, which have their own set of traps.

Well, it's your money that would be going into them.

But if you don't trust the experience of Nuveen's analysts (read up on the firm), and you don't trust the independent bond rating firms, and you don't trust bond issue diversification of 139 different issues (see who the issuers are), and you don't trust additional safeguard of 7 different insurers, I don't think you are really wanting to put your money into munis.

 

[twaddle]

Trust but verify.

Besides, it was Brewer's idea. And I trust his expertise as a credit analyst.

 

[Danny]

ttwaddle - I've been using NUV NXP NXR NXQ for a few years now....happy with them....fairly low AMT...no leverage...4.8-4.9% return think there was an announcement while back about an end of year Cap Gains Distribution....haven't worried much about Nuveen

Just in case you or anyone else isn't aware of this Nuveen site - I find it very useful covers ETF & CEF and not just Nuveen's

ETFConnect - Home

 

[twaddle]

Thanks, DT. (Hey, when did you change your name? Don't you owe me money for TGT?) Ex-div for the cap gains is Dec 12, so I plan to wait till then.

 

[brewer12345]

Of the 135 bonds, 59 are insured:

FSA: 7
FGIC: 12
AMBAC: 10
MBIA: 22
XLCA: 3
RAAI: 4
FHA (UB): 1

Most of these are brand-name insurers, but I have no way to evaluate them. Brew?

I would go look at the recent press releases put out by Moody's, S&P and Fitch on the likelihood that these guys will be inadequately capitalized to maintain their rating. XL is probably fine. Ambac and MBIA are so big in the business that they will likely be able to recap if they need to. Dunno about FGIC and FSA. Not familiar with RAAI. FHA is fine.

But Nuveen hopefully underwrote the credit exclusive of the insurance.

 

[Danny]

Here's a recent story on Muni's in the WSJ.
Article says the average yield on individual munis is 4.29% - the CEFs I use at Nuveen are yielding close to 4.8 - 4.9% - at least as good as CDs I'm seeing at my brokers. Tax wise of course much better.

 

[youbet]

Here's a recent story on Muni's in the WSJ.
Article says the average yield on individual munis is 4.29% - the CEFs I use at Nuveen are yielding close to 4.8 - 4.9% - at least as good as CDs I'm seeing at my brokers. Tax wise of course much better.

Is there a catch?

 

[Danny]

I'm sure there's a catch like there is in everything...there are no absolute guarantees in life (except most of us die at some point) or in the investment world...however municipals that are AAA are closer than many investments to being catchless...helps also to spread the risk through a fund of them

 

[youbet]

Sorry, should have been more specific.......

What's the catch for the CEF to pay about 1% higher yields than the OEF's?

I have money in SNTIX. I picked it because it is rated as one of the lower risk tax free OEF's. But it is only yielding about 4%. Is there a catch go moving to a CEF, such as more risk or ??

 

[RetireeRobert]

Sorry, should have been more specific.......

What's the catch for the CEF to pay about 1% higher yields than the OEF's?

I have money in SNTIX. I picked it because it is rated as one of the lower risk tax free OEF's. But it is only yielding about 4%. Is there a catch go moving to a CEF, such as more risk or ??

Not a catch, but one possible explanation of the higher yield on the CEF's is that they are selling at discounts to their net aset value--close to historic high discounts right now. The discounts widened this summer as the credit markets had their turmoil.

 

[RetireeRobert]

The December issue of Smart Money column, Streetsmart Strategies, disusses them and opines on CEF's "the babies were thrown out with the bathwater" (page 40, 12/07 Smart Money mag).

 

[youbet]

Thanks RR.

 

[Danny]

oh, I see what you mean - I think like Robert said part of the reason is the share prices are below the NAV - of the 4 I own the discount ranges from about 2-9%

NUV NXP NXR NXQ

 

[youbet]

oh, I see what you mean - I think like Robert said part of the reason is the share prices are below the NAV - of the 4 I own the discount ranges from about 2-9%

NUV NXP NXR NXQ

Thanks Danny, I'll check those out. An extra 1% would be meaningful.

Edited: OK, took a quick look. Duration is significantly longer so one catch would be higher volitility with interest rate swings. That might not be a good thing since I'll be selling my tax free funds in a year or so once deferred comp ends and I'm living on portfolio withdrawals (future lower tax bracket). But, more research needed. Thanks for mentioning this.