6 BARRON’S September 2, 2019
a set number of shares, which aren’t re-
deemed but instead trade like stocks at
pricesthatmaybeaboveorbelowtheirnet
assetvalues,andtheyoftenborrowmoney
toleveragetheirportfolios.Thatincreases
both yield and risk.
The main danger is that their cost of
borrowing can rise, cutting distributions
and,inturn,theshareprice.Thattypically
happenswhentheFederalReserveisrais-
ing rates.
Thecurrentlikelihoodisthatthoserates
willfall,however;federal-fundsfuturesput
a 95.8% probability on a quarter-point cut
at the policy meeting ending on Sept. 18,
according to the CME Group’s FedWatch
site, as of midday Friday.
Kotok also points out that muni closed-
end funds tend to have limited liquidity,
because most are small- or microcap
stocks. That should be less of a problem
for individual investors looking to buy or
sell the bigger funds. And the rewards are
tax-free yields over 4% in many cases,
equivalent to 6.35% on a taxable fixed-
income investment to an investor paying
37% federal taxes.
But investors should look beyond just
yield and take into account valuation. For
instance, PimcoMunicipalIncomeFund
II (ticker:PML),yields4.9%,buttradesat
23.97%aboveitsnet-assetvalue,according
toCEFconnect.com.Paying$1.24foradol-
lar’s worth of assets isn’t exactly a value
play.
Slightly lower yields are available at
significant discounts from the Nuveen
Quality Municipal Income fund (NAD),
witha4.42%yieldata10.36%discount,and
Nuveen AMT-Free Quality Municipal
Income fund(NEA),witha4.47%yieldat
a9.52%discount.Thesefundshaverespec-
tive market capitalizations of $3.2 billion
and$4.1billion,whichshouldmakeforbet-
ter liquidity than smaller funds.
Investorslookingforareturnofcapital
at a future date, similar to a bond, can
consider the BlackRock Municipal 2030
TargetTermTrust (BTT),oneof Barron’s
topincomepicksfor2019.Itsloweryieldof
3.14%reflectslessriskfrompossiblerising
yieldsandfallingbondprices,owingtothe
fund’s shorter effective duration. It also is
among the larger muni CEFs, with a
$1.8billion stock market value.
To be sure, these tax-free returns look
attractivemainlyinthecontextofthehead-
longplungeinglobalyields.Butfortaxpay-
ingAmericans,munibondsatleastprovide
a positive yield, all of which they can
keep.
email: [email protected]
Up & Down Wall Street continued
U.S. bond market for top-quality fixed-
incomeinvestmentsforyieldswithnotonly
a positive sign but also an integer.
IntheTreasurymarket,mostmaturities
yield 1.5%, or less, out to the benchmark
10-year. And last week, the 30-year bond
yield traded at a record low under 2%. As
internationalimpactshavedepressedU.S.
Treasury yields, fixed-income investors
havebeenseekinghigher-yieldingalterna-
tives, as Alexandra Scaggs details in the
Income Investing column.
Globalinfluencesarefeltlessinthesec-
toroftheU.S.bondmarket mostdomesti-
cally oriented: municipal securities. Their
primary attraction is that their interest
paymentsareexemptfromfederalincome
taxesand,insomecases,stateandlocalin-
come levies. That makes munis relatively
uninteresting to global investors, such as
sovereign-wealthfunds,andtax-exemptin-
vestors,likepensionfundsorendowments.
But munis have been left behind in the
headlongplungeinyields. Sometop-grade,
tax-freelong-termmunicipalbondsprovide
ahigheryieldthanthetaxable30-yearU.S.
Treasury, David Kotok, the chairman and
chief investment officer of Cumberland
Advisors, writes in a note to clients.
Reached on one of his famous fishing
retreatsinMaine,KotoksuggeststhatU.S.
individuals should take advantage of this
anomalous situation by opting for some
munis with credit quality comparable to
Treasuries, but with higher yields.
AmongthemaretheIrion,Texas,Inde-
pendent School District bonds with a 4%
coupon and maturing Aug. 15, 2044, which
are priced at a premium to yield 2.09%,
based on the worst-case assumption that
they will be redeemed early, on Aug. 15,
2024.Theyhavetriple-Aratingsbecauseof
their backing by the Texas Permanent
SchoolFund,whoseuniquestatuswasdis-
cussed in Barron’s this year.
Kotok also likes Minnesota House Fi-
nanceAgency2.75%couponbonds,dueon
July 1, 2044, and providing the same yield
to maturity. The bonds are rated Aa1 by
Moody’sInvestorsServiceandAA-plusby
Standard&Poor’s,bothasinglenotchbe-
low the rating agencies’ respective top
grades. But the Minnesota bonds are
backed by Ginnie Mae securities, which
carrythefederalgovernment’sguarantee.
For an investor in the top federal tax
bracket, that 2.75% yield is equivalent to
4.37% on a fully taxable bond.
Evenhighertax-freeyieldscanbefound
in another relatively obscure part of the
fixed-income market, closed-end muni
funds. CEFs differ from open-end mutual
fundsintwoimportantrespects:Theyissue
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