Indiscriminate Selling by holders of closed-end municipal bond funds has sent yields soaring, making this a good time to pick up some bargains, in the view of some analysts.
"A lot of them look very cheap right now," said Mariana Bush, a closed-end fund analyst at Kemper Securities. In a new report, Bush and Kemper analyst Sonia Vora noted that some leveraged municipal funds are yielding more than 8%.
The high yields on municipal funds also may reflect investors' anticipation of dividend cuts. But even after dividend cuts, the funds still would be attractive, Bush said.
Anthony N. Maltese, a vice president and senior analyst with Smith Barney Inc., agreed.
"Even with a presumed dividend cut of 50 to 60 basis points, these are still high yields," he said.
Maltese said that the heavy selling of municipal bond funds is widening discounts to "very attractive" levels. "We would be buyers on this type of weakness," he said. "We don't think it's fundamental."
Two years ago, closed-end municipal funds were generally trading at about a 3% premium to their net asset values. This turned into an approximately 8% discount in September, the Kemper analysts said. Since June, the median discount on the funds has doubled.
The 10 largest national, tax-exempt closed-end funds had a year-to-date average annual total return to net asset value of negative 6.28% as of Oct. 31, according to Lipper Analytical Services Inc. In comparison, the funds had an average annual total return to net asset value of 12.65% for the same period last year, Lipper statistics show.
The best values, the analysts said, may be available on leveraged closed-end funds, which got hammered when rates started rising early this year.
In telephone interviews, Maltese and Bush said that even if interest rates rise further, prompting greater discounts, now is a good time to pick up the municipal funds.
"We're telling our sales force that this is the time to add to positions," Maltese said. "I would rather be early than late."
"At some point, cheap is cheap enough," Bush said.
In addition, many investors may not begin to consider the attractiveness of closed-end funds until late December or early January, after tax loss selling has dissipated, Bush said.
Meanwhile, Maltese said he expects discounts to contract sharply in early 1995, as cash-laden investors confront limited supply.
Another analyst recommends that investors exercise caution in sifting through the discounted funds.
"I don't think you can just go out and buy the most deeply discounted closed-end funds," said Colin Mathews, an analyst for Morningstar Inc.
While some of the newer leveraged closed-end funds may offer the heftiest discounts, investors could see the net asset value of such funds decline if interest rates rise further, Mathews warns.
"You really have to be kind of picky," Mathews said. "You might lose double-digits on the capital side as the net asset value goes down.
