Leveraged Muni Bond Funds

[Packer16]

This appears to be an interesting space given the long-term deflationary trends in the system and these are yielding 7 to 8% tax-free (tough to beat those type of yields for fixed income).  These funds but LT munis financed with short-term borrowings.  Given that short rates won't increase until inflation is high and unemployment low, this looks like an interesting area.  Many of these funds are approaching 2008 yields.  Some interesting names are PMF and PNF (for NY residents).

 

Packer

[plato1976]

I was somehow scared by Meredith comments on local gov debt problem;

so how can we be comfortable with the holding of these muni funds ? We cannot check their holding one by one - we have to trust them...

 

This appears to be an interesting space given the long-term deflationary trends in the system and these are yielding 7 to 8% tax-free (tough to beat those type of yields for fixed income).  These funds but LT munis financed with short-term borrowings.  Given that short rates won't increase until inflation is high and unemployment low, this looks like an interesting area.  Many of these funds are approaching 2008 yields.  Some interesting names are PMF and PNF (for NY residents).

 

Packer

[thepupil]

These are interesting because of their favorable leverage. A lot of them use auction rate securities, a market that is permanently broken and are paying close to nothing and likely will be for some time. It seems like a more intelligent way to load up on duration than mREITs which are much more levered and dependent on short term repo and own negatively convex securities.

 

But you still are loading up on duration, for better or worse, and also bearing more credit risk than an agency mREIT (and probably most hybrid mREITs). I think they are interesting too though.

 

From PMF's website:

 

<1 Year                         6.00

5-10 Years               30.00

10-20 Years               33.00

20+ Years                       31.00

Effective Maturity (yrs.)       15.52

 

Effective Duration (yrs.) 9.43

 

 

http://seekingalpha.com/article/1552562-hidden-treasure-in-this-7-tax-free-yield-play

 

http://seekingalpha.com/article/932061-the-not-so-obvious-reason-why-pimco-cefs-trade-at-a-premium

[fareastwarriors]

What about all those Nuveen CEFs that are trading at discounts to NAV?

 

It seems like PIMCO CEFs rarely trade discount to NAV and often times trade at a substantial premium to NAV. 

[CorpRaider]

I've been nibbling the pimco funds as well.  I scaled into a little PML with my "granny money" several weeks back because at that time PML had the smallest premium and lowest duration of the pimco's.  They have really jacked up the duration over the past month or so though.  I also bought a little of one of the black rock one that has some higher rated bonds and a big discount to NAV; MQT is the one I went with there.

[plato1976]

Hi, Everyone:

 

Due to the tax concern, I believe many should consider this as an asset allocation opp (including myself).

My question is, in 2008 PMF lost 35% NAV, why the drop was so sharp ? I checked some fidelity open-end muni bond fund and they dropped way way less (almost no drop actually). Is it b/c PMF had a portfolio that has much inferior quality ? The yield is nice now, but I don't want to lose significant nav when a downturn hits - I buy into a bond fund in the hope it can hold nav so that in the market panic I can switch to some fat equity opps.

 

 

I've been nibbling the pimco funds as well.  I scaled into a little PML with my "granny money" several weeks back because at that time PML had the smallest premium and lowest duration of the pimco's.  They have really jacked up the duration over the past month or so though.  I also bought a little of one of the black rock one that has some higher rated bonds and a big discount to NAV; MQT is the one I went with there.

[thepupil]

"I buy into a bond fund in the hope it can hold nav so that in the market panic I can switch to some fat equity opps. "

 

I think one should consider this a "fat-equity opp" with equity-like downside, not insurance by any means. Also they lost a bunch in 2008 because they had an effective margin call (see below). They probably had to reduce leverage because of '40 act restrictions on leverage for CEFs and the like.

 

From Morningstar

This highly leveraged municipal fund is high-risk, high-reward. The fund typically generates its high distribution by venturing down the credit spectrum into nonrated and junk-rated muni debt, focusing on the intermediate and long portions of the yield curve, and by leveraging its holdings. Compared with other leveraged municipal funds the fund is taking on more credit risk. Though its interest-rate risk is high, it is about average for the peer group. This strategy has worked well in recent years but has not held up in down markets such as in 2008. Both sister funds, which have identical strategies but were forced to deleverage, hover around the bottom of the peer group over the trailing five-year period. The addition of star municipal manager Joe Deane means that investors are likely in good hands, though he has not significantly departed from this strategy since joining PIMCO’s muni team. Because of these factors, the fund gets a Morningstar Analyst Rating of Neutral.

[CorpRaider]

PMF didn't have to liquidate positions, PML and PMX did, but all the leveraged munibond funds tanked during that period (remember meredith's great call?).  A normal open-ended fund won't employ leverage, which will obviously result in lower volatility.  In fairness, check out their 2009 returns, which is sort of what packer was saying.

[fareastwarriors]

Nuveen has "no leverage"    CEFs available. Most are trading at a discount.

 

 

 

 

[Philip Morris IV]

I've used KSM in the past, may look at it again.  Yielding 7% and at a slight discount.  What I like most about these funds is they pay monthly.

[CorpRaider]

Did you guys pull the trigger on these?  I nibbled a little PML and MQT before the fed gave us a little gift.  Nice to get a little lucky sometimes.

[plato1976]

why did you pick PML instead of PMF ?

muni bond makes sense for high tax bracket guys...

have to say , the marginal tax rate is killing the motivation of average w2 professionals

 

Did you guys pull the trigger on these?  I nibbled a little PML and MQT before the fed gave us a little gift.  Nice to get a little lucky sometimes.

[CorpRaider]

why did you pick PML instead of PMF ?

muni bond makes sense for high tax bracket guys...

have to say , the marginal tax rate is killing the motivation of average w2 professionals

 

Did you guys pull the trigger on these?  I nibbled a little PML and MQT before the fed gave us a little gift.  Nice to get a little lucky sometimes.

 

Smaller/zero premium when I bought it (probably because it "blew up" a few years ago. heh) and lower duration in the portfolio at the time; they jacked the duration up a lot since I bought it, but that was after the blood bath, so maybe it will pay off.  Yeah, even in a 25% bracket it was yielding about 9% tax equivalent.  Just took a little schnitzel.  I figure I might put whatever pittance I'm going to allocate to fixed income in this environment into some of these muni funds.  Maybe I will scale in each time I read an article in the financial press about record outflows.

[CorpRaider]

Barrons and some others, like Doug Kass, are focusing on these and other CEFs a lot lately.

[fareastwarriors]

US urged to examine oversight of $4tn muni bond market

 

 

http://www.ft.com/intl/cms/s/0/f4644372-7ca3-11e3-b514-00144feabdc0.html#axzz2qIcZZaE0

 

 

The US should re-examine oversight of the $4tn municipal bond market, where states and municipalities raise money, according to a task force co-chaired by Paul Volcker, former Federal Reserve chairman.

 

Funding practices in the muni bond market have been thrust into the spotlight after Detroit last year filed the largest municipal bankruptcy and concerns arose that Puerto Rico risked defaulting on $70bn of debt that it accumulated predominantly in the muni market. Both continued to borrow over the past decade even as their finances foundered.

 

 

 

 

 

 

 

The so-called Tower Amendment to the Securities Exchange Act of 1934 limits the jurisdiction of the Securities and Exchange Commission in the municipal bond market to fraud cases. Unlike corporate issuers, municipal bond borrowers are not required to register securities with the SEC nor are they held to the same standards of disclosure. But muni issuers agree to file annual financial statements and disclose significant events, such as ratings downgrades or missed interest payments.

 

“The Tower Amendment should be revisited to see if the SEC should be given the same jurisdiction over the issuance of municipal securities as it has over issuance of corporate securities,” says a report from the State Budget Crisis Task Force, which is co-chaired by New York’s former lieutenant-governor Richard Ravitch, and was formed to study state finances.

 

The call was part of a larger package of recommendations meant to make state finances more sustainable. Tax revenues have rebounded since the financial crisis and recession, which ripped holes in state and local budgets and revealed chronic underfunding of public pensions. But the task force argues that problems, including rising retirement and healthcare costs, poor administrative practices and a lack of co-ordination between federal and state policy makers, continue to imperil the financial health of states.

 

Among the measures the group is recommending are changes to state and local budgeting, including preventing them from accounting for borrowed funds as revenue.

 

“Too many cities are in peril because they over-borrowed,” Mr Ravitch said.

 

Budgetary actions by the federal government have ramifications for state and local governments, but there is scant analysis and dialogue about these effects. For example, the report says, proposals have called for raising the eligibility age for Medicare. But most states and local governments provide medical benefits for their eligible retirees and employees until they qualify for Medicare.

 

The task force called for a centralised entity within the federal government to measure and report publicly the impact of federal initiatives on state and local governments.

 

[ERICOPOLY]

“Too many cities are in peril because they over-borrowed,” Mr Ravitch said.

 

Yeah, well, making muni bonds tax-exempt probably had something to do with that.  The cheaper the interest rate, the more you will borrow.  Eventually, you wind up with the same absolute interest payment burden but a much higher absolute amount that you owe.