A Closer Look at Muni Closed-End Funds in Rising Interest Rate Environment
The Municipal bond closed end fund market is currently navigating through some rough waters due to rising interest rates. In this article, we take a closer look and show how BondView can be be helpful to investors in these turbulent times.
Summary
- Closed-end municipal bond funds are down in value due to rising interest rates, especially those employing leverage to boost returns.
- The market value of older, low-yielding bonds is dropping, while fund borrowing costs are increasing, reducing investor dividend distributions.
- Unlike open-end funds, the structure of closed-end funds compounds the problem when investors want to sell fund shares since fund managers must sell bonds at depressed prices causing further pain to the fund.
- Some funds are reducing leverage to mitigate losses but at the risk of selling assets at lower market prices.
Unravelling the Impact
Closed-end municipal bond funds, particularly those leveraging borrowed money, are feeling the pinch of rising interest rates. This leverage, which was a boon during the previous low-interest-rate decade but is now becoming a real problem. The cost of short-term borrowing is climbing, and the market value of older, lower-yielding bonds is down.
The structure of these funds further exacerbates the issue. Unlike the more flexible open-end funds, closed-end funds don’t allow easy cash-outs for investors, nor do they enable fund managers to sell additional shares. This rigidity leads to a situation where the funds are unable to refresh their portfolios with newer, higher-yielding bonds.
| Symbol | Name | Total Fund Value | Non Inv. Grade | Unrated | Market Rating | Liquid % | Illiquid % | Insured | Cash | Leverage |
|---|---|---|---|---|---|---|---|---|---|---|
| PNI | PIMCO NY Municipal Income II | $69,832,980 | 0.88% | 0.00% | 2 | 83.50% | 16.50% | 0.00% | 2.99% | 48.15% |
| DSM | BNY Mellon Strategic Muni Bond | $241,212,012 | 6.64% | 5.46% | 2 | 78.40% | 21.60% | 2.68% | 0.00% | 47.39% |
| AFB | AllianceBernstein Nat Muni Inc | $266,753,006 | 4.21% | 0.00% | 2 | 80.30% | 19.70% | 0.00% | 5.84% | 46.30% |
| PNF | PIMCO NY Municipal Income | $53,504,957 | 0.87% | 0.00% | 2 | 83.30% | 16.80% | 0.00% | 1.85% | 44.94% |
| MIW | EV MI Municipal Bond | $18,825,816 | 3.46% | 41.89% | 3 | 74.20% | 25.90% | 4.21% | 1.73% | 44.85% |
| PCQ | PIMCO CA Municipal Income | $160,579,818 | 5.09% | 0.00% | 3 | 83.40% | 16.60% | 9.45% | 0.60% | 44.58% |
| PYN | PIMCO NY Municipal Income III | $29,365,811 | 0.84% | 0.00% | 2 | 85.10% | 14.80% | 0.00% | 2.26% | 44.53% |
| PML | PIMCO Municipal Income II | $480,191,432 | 5.96% | 0.00% | 2 | 79.30% | 20.70% | 0.67% | 1.99% | 43.59% |
| PZC | PIMCO CA Municipal Income III | $147,945,062 | 4.98% | 0.00% | 3 | 83.00% | 17.10% | 7.46% | 2.22% | 43.40% |
| EMJ | EV NJ Municipal Bond | $31,104,742 | 5.43% | 37.39% | 3 | 71.00% | 29.00% | 12.14% | 1.21% | 42.91% |
| PMF | PIMCO Municipal Income | $211,118,841 | 4.82% | 0.00% | 2 | 81.10% | 18.80% | 0.00% | 3.24% | 42.70% |
BlackRock’s Leveraged Muni Closed-End Funds: A Case in Point
According to the Wall Street Journal, BlackRock’s leveraged muni closed-end funds have notably cut distributions in the first three quarters of this year, reflecting the strain the rising interest rates are placing on such funds. The market value of the older bonds within these funds is dropping due to the emergence of newer, higher-interest bonds, making the situation grim for investors.
Investor Strategies and Activism
In response to these unfolding dynamics, some funds are reducing leverage by selling assets to pay back a portion of the funds’ borrowing, aiming to rein in losses. However, this strategy carries the risk of unloading assets at ultra-low prices, especially in a down market. On the flip side, this scenario opens a buying opportunity for some: Saba Capital Management is targeting shares in closed-end funds managed by BlackRock and others, aiming to bring about structural changes to bridge the gap between market prices and net asset values.
Conclusion:
As the storm of rising interest rates continues to brew, understanding the nuances of your investments in closed-end municipal bond funds is important.