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Closed End Muni Funds

At a point in time when a 10 year treasury earns 3.37%, a 30 year treasury earns 4.44%, and an investment grade corporate bond portfolio with average maturity of 12 years (LQD) has an indicated yield of 4.7% you just have to wonder where any sort of income is available.  My first conclusion is that I would rather hold a equity REIT ETF (IYR) at 3.38% than hold a 10 year treasury at 3.37%.  My second conclusion is that both yields leave quite a bit to be desired.

My next thought is to look at the current unloved asset class in the investment world – Municipal Bonds.  The market vectors long municipal (MLN) earns a whopping 5.34% (average maturity 24.22 years!), the iShares S&P AMT-Free Muni (MUB) earns a healthy 3.63% (average maturity 10.46 years).  These funds are interesting because they are federal tax free.  Assuming a 25% federal tax bracket ($69-139,500 married filed jointly) that works out to a 7.12% (.0534/.75)  and 4.8% tax-equivalent yield respectively.  Obviously if you pay more in federal taxes these yields are even higher.

The follow up is to look at the unloved of unloved – closed end muni funds.  The beauty of closed end funds is that when people do not like the asset class, the closed end funds can trade at a discount to the NAV – meaning that you can buy the funds for less than you can buy what the fund actually owns.  I will not speculate on the value of the funds below, but allow you to peruse the closed end muni funds that trade at discounts to their net asset values.


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