On Leveraged Municipal Bond Closed-End Funds
David Merkel | Sep 27, 2013 01:52AM ET
I’ve received two notes recently on Closed-end Leveraged Muni Bond Funds. Here’s one:
David,
I have been asked several times about the Blackrock Target Term Municipal Bond Trust (“BTT”). The appeal is obvious: at $17, it offers a 7% tax free yield. A theoretical $25 redemption price in about 15 years adds roughly 2.5% per year to the total return (not tax free, but at least tax deferred).
All wonderful stuff. What I do not understand is the leverage via Tender Option Bonds. I realize TOB’s equate to borrow short/lend long, which has obvious risks, but the range of outcomes and probabilities is beyond me.
Can you shed some light on this?
And here is the other:
What about the closed end funds of Eaton Vance that are trading at a discount to their nav? I’m thinking specifically of the muni one EIV?
Also do you know the statistics of how many munis go to maturity vs getting called in 10 years?
Thank you for all you do to educate your reader!
I responded to the latter:
With CEFs, I look at the fund’s website, which I note above. This funds has a lot interest rate sensitivity, and a lot of oddball credits, many of which are insured to AA. Remember that many guarantors failed in the last crisis. The question is economic necessity of existence for each creditor, which would take a lot more work to determine.
I don’t have any data on calls, but given the falling rate environment, most healthy credits that could call, did call. It would be stupid not to call.
But with respect to the former:
You can get the basic data on BTT but here is the full treatment from Nuveen .
Here’s the trouble with muni bond portfolios: to get a great yield you have to take a lot of the following risks:
- Liquidity
- Credit
- Guarantor
- Leverage
- Duration
These are not trivial risks, and so I am unlikely to invest in high yielding municipal bond Closed End Funds.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.