每周评论：市政债券CEF-降息后积极一周

The rate cut is a fact, and the municipal bonds were among the biggest winners from that event.

The main index distributed its regular monthly dividend of $0.2264 per share.

We continue to follow the most important yields and municipal/Treasury spread ratio.

Most of the funds from the sector are trading at positive Z-scores, and we do not see a statistical edge to include some of them in our portfolio.

Over the past few months, most of you have noticed our increased activity in closed-end funds as the inflow of volatility finally shook them up and created various arbitrage and directional opportunities for active traders like us.

Currently, we are cautious when we choose our long positions, as most of the closed-end funds which hold municipal bonds have lost their statistical edge and are traded at positive Z-scores. However, there are several interesting pair trade opportunities which can be traded. For the conservative market participants with a longer investment horizon, I still see interesting dividend opportunities which are trading at high discounts.

Over the past weeks, most of the market participants were cautious in their actions as they expected to see what will be the outcome of the next meeting of the Federal Reserve. Аfter all, on Wednesday, the central bank of the United States decided to cut the rates by 25 basis points, matching the market expectation. As a result, the safer and lower yielders such as municipal bonds were among the biggest winners. Of course, here it is good to mention the fact that the Munis have relatively longer duration compared to the high-yield and corporate bonds, and this fact makes them exposed to changes in the interest rates.

The iShares National Muni Bond ETF (MUB) rose by $0.35 and finished the Friday session at $113.89 per share. It is important to mention that the ex-dividend date of the main index was on Thursday, and it distributed a monthly dividend of $0.2264 per share.

As you know, we follow the performance of the U.S. Treasury bonds - considering them a risk-free product - with maturities greater than 20 years: the iShares 20+ Year Treasury Bond ETF (TLT). The reason for that is the strong correlation between these major indices, and the chart below proves it. Additionally, a statistical comparison is provided by our database software:

Investing in municipal bonds is popular because they have the potential to offer higher yields than similar taxable bonds. If an investor wants to know whether muni bonds are cheap in comparison to taxable bonds or Treasuries, they could find out by comparing them. However, this method does have its limitations, and the investor should perform a more thorough analysis before making a decision:

The Municipal/Treasury spread ratio, or M/T ratio as it is more commonly known, is a comparison of the current yield of municipal bonds to U.S. Treasuries. It aims to ascertain whether or not municipal bonds are an attractive buy in comparison. Essentially, an M/T ratio north of 1 means that investors receive the tax benefit of muni bonds for free, making them even more attractive for high net worth investors with higher tax rate considerations.

The narrowing spread and 3-month LIBOR are important for the leveraged municipal funds, and they can be highly affected by them. The 3-month LIBOR rate is a commonly used funding benchmark for the municipal bond CEFs.

Data by YCharts

BlackRock and Nuveen CEFs announced their distribution with no change from the prior distributions. Below are the rest of the funds which announced their dividends:

1. Biggest price decrease

2. Biggest price increase

1. Lowest Z-Score

The expected rate cut became a reality, and on a theory, the fixed assets with good credit quality should be among the winners from such decision. In fact, municipal bonds reacted positively on the outcome of the meeting of the central bank. All of the Munis which we follow increased their net asset values. The situation with the prices was very identical as only 10 of the funds reported a decrease in their prices. All of the rest finished in green territory.

Sorting the funds by the lowest Z-score, we find out that only a few of them are statistically undervalued. The Z-score is an appropriate indicator to see how many times the discount/premium deviates from its mean for a specific period. In our case, we use it to find closed-end funds with a statistical edge for a

"Long"

position. No doubt, the statistical edge in the sector has vanished, and most of the Munis are traded at positive Z-scores. If you are a long-term investor and believe that the interest rates will go even lower, then you may decide to invest in such funds. However, for me, the period is not very attractive because I cannot use the Z-score in my analysis.

Massachusetts Health&Education Tax-Exempt Trust (MHE) is one of the funds with a negative Z-scores which can be reviewed. Recently, the dividend was decreased from $0.0440 to $0.0400 per share. As a result, the price of the fund decreased and its Z-score fell below the neutral zone. The current yield of MHE is 3.75% and with the adjusted dividend the earning/coverage ratio of the fund rose to 102.25% per share.

I continue to follow the performance of the New York PIMCO funds PIMCO New York Municipal Income Fund II (PNI) and PIMCO New York Municipal Income Fund III (PYN) which have negative values of their statistical parameters. If their prices continue to fall, I may review them as potential "Long" candidate. Pretty soon PNI will be traded at a discount and I am planning to take a small long position. It is not a very common situation to have an opportunity to buy PIMCO funds at their net asset value or at a discount.

2.

Highest Z-Score

This section may be very useful because it can show us where the optimism prevailed over the logic. Z-score is a tool which can help us to identify relatively overpriced funds. From our perspective, Z-score above 2.00 points is a signal for relatively expensive funds. In our case, we have many Munis above that border and some of them even reached extreme levels of 4.00 points. I would like to say several words for the leaders of the ranking and to show you that such high Z-score cannot be maintained.

I will start with MFS High Income Municipal Trust (CXE). Definitely, a serious buyer appeared over the past days. Currently, the fund has 4.00 point Z-score and is traded at a premium. The recent spike made it overpriced compared to its peers, and I believe it will be difficult for CXE to stay at such levels. The case of Nuveen Massachusetts Premium Income Municipal Fund (NMT) is very similar. Its Z-score is even higher, and from my perspective, there is a risk to buy such fund at these levels.

The average one-year Z-score in the sector is 1.62 points. Last time, the average Z-score of the municipal sector was 1.41 points.

3.

Biggest Discount

The sample provides us CEFs with attractive discounts of more than 11%. A fund which I like is Nuveen Pennsylvania Investment Quality Municipal Fund (NQP). Its current yield of 4.30% is very attractive if we compare it to the rest of the Munis with similar discount. Still, based on the discount, the fund seems undervalued compared to its peers. Its earning/coverage ratio is 100%, and 99.0% of its assets are from issuers located in Pennsylvania.

"Health Care" and "Tax Obligation/General" are the sectors with the biggest weights. From a credit quality point of view, we do see that most of the assets are with ratings of "AA" and "A".

4.

Highest Premium

Although we saw a dividend cut for several PIMCO funds in April, the funds from this sponsor continue to be the ones which are traded at the highest premium. The trust in the management team and the good past results are one of the main reasons why the market participants want to have them even at a price higher than the net asset value.

My simple recommendation here is to stay away from long positions in closed-end funds which are traded at a high premium or relatively high Z-score. Western Asset Managed Municipals Portfolio (MMU) is a very good example of what I am talking about. No doubt, PCQ is another fund which should be аvoided.

The average discount/premium of the sector is -4.07%. Last time, the average spread between the prices and the net asset values of the funds was -4.71%

5. Highest

5-year Annualized Return On NAV

The above sample shows the funds with the highest return on net asset value for the past five years. The average return for the sector is 5.47%. From the above participants and their parameters, only PIMCO New York Municipal Income Fund II (PNI) and the Eaton Vance Municipal Income Trust (EVN) caught my eye with their relatively low Z-scores and discount/premium metric.

6.

Highest Distribution Rate

:

The average yield on price is 4.14%, and the average yield on net asset value is 3.98%. An important notice that I would like to make here is to be rational and to include the earning/coverage ratio to your analysis. Some of the market participants invest in the funds which pay higher yields, but they do not take into consideration the risk of a potential dividend cut if the dividend is not covered by the earnings.

The Nuveen Municipal High Income Opportunity Fund (NMZ) is a fund which caught my attention in a positive way. It offers a 5.04% current yield, and its dividend is fully covered by the earnings. On top of that, the UNII balance per share is in green territory.

7.

Lowest

Effective Leverage %

The average effective leverage of the sector is 35.7%. Logically, most of the funds with lower effective leverage have lower distribution rates compared to the rest of the closed-end funds. Seven funds from the sector have effective leverage equal to zero.

Above, you can find the chart of the funds with the lowest effective leverage and their yields on net asset value. If you are not a big fan of the high leverage, this chart will be very helpful.

Compared to the previous years, the discounts of the closed-end funds holding such products have significantly widened, but we remain cautious when we select our long positions due to the high Z-scores in the sector. However, there are several interesting trades which you can review.

I/we have no positions in any stocks mentioned, but may initiate a short position in PCQ over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.