Bonds: Munis

(Chicago)

You might not pay much attention to them—most don’t—but closed end muni funds are an excellent deal right now. They are offering high yields relative to other fixed income peers. For example, you can readily get 5% yields on CEF muni funds, equivalent to an 8.45% taxable yield if you are in the top tax bracket. And to be clear, these are not junk muni bonds. The reason yields are so strong is leverage gained from borrowing money at short-term interest rates and buying longer-term bonds. That usually creates a risk that short-term rates could rise, causing losses. However, given the Fed’s position right now, that seems highly unlikely.


FINSUM: This is an ideal time to by CEF muni funds given the low rate risk and solid overall yields. Check out BlackRock’s MFT (5.39% yield), Putnam’s PMM (5.18%), or BNY Mellon’s LEO (5.56%).

(New York)

Muni bonds are seeing yields way above average right now even as Treasury bonds linger near all-time lows. The reason why is that it is increasingly apparent that there has been a huge erosion in municipal credit quality alongside the lockdown. Costs have surged at the same time as revenues have plummeted, leading to a significantly deteriorated financial picture for municipal issuers. The has been exacerbated by the fact that municipalities have largely been unsupported by the Fed as opposed to corporate issuers. But the sell-off has created opportunity, as even AAA issuers are seeing big discounts and much higher than usual spreads to Treasuries.


FINSUM: This is all about careful credit selection, as there are big opportunities, but there may also be major pitfalls.

(Chicago)

The muni market is at an interesting crossroads. There have been big fears that the current lockdown might be a huge negative for muni credits. The lockdown not only raises costs, but it constrains tax revenue at the same time. On its own, this is a big threat. However, the Fed has set up a liquidity facility particularly for states and municipalities to borrow, which is a major help. That said, analysts say some credits will be excluded. The problem is that the Fed has put limits on the size of cities and counties able to participate, as well as fairly onerous language, such as municipalities having to promise that they cannot “secure adequate credit accommodations from other banking institutions”.


FINSUM: The Fed’s restrictions on this program are surely going to constrain its efficacy. So, on the whole this seems like good news, but not as good as investors would like.

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