A few points come to mind along with a question or two.
Most, not all, Muni CEFs use leverage. If the curve normalizes and rates in the middle of the curve go up later in the decade (both reasonable possibilities) these funds will get hit to some degree. Also there will be the occasional shock to the bond market. About the worst of these was in summer 2003. It might be worthwhile to see how a given fund did during that time period.
This chart shows a Nuveen Arizona fund during that time period. The fund, as funds go, got crushed, dropping about $2 per share in a few weeks.There is no way to know what will happen the next time there is a bond market crisis but this can be a constructive exercise.
The funds with leverage would obviously be riskier bets. I don't have any of these for clients but owning this part of the market is some small measure within a diversified bond portfolio is probably OK, but to be clear I have no interest in these. If I know a client can hold to maturity I prefer individual issues, all of the past caveats about slippage notwithstanding.
The reader mentions something about being more interested in funds with discounts. I think they all trade at discounts, or it seems like they do. A discount is better than a premium but I would not expect the discount to close in a meaningful way ever. If it does, great but I would not expect it.
As far as a question from me, are you sure tax free income for a retired person is necessary? The yield could be favorable of course but a lot of people have less income in retirement and so tax free yield may not be the best thing. I don't know what is right for the reader's mother of course but that is the question I would ask.
2 comments:
Roger, Thanks for the thoughtful reply. Good advice. Mom's a widow in her 80s, good health and in the 28% bracket. She grew up in the depression and likes tax free income even if it doesn't always make sense for her. I have her fixed income laddered in Munis, Treasuries, Gov't Agencies, and some CDs (all in the 1-10 year range).
I had thought that perhaps a sprinkling of CEF Muni funds might provide an income 'kick' so I could convince her to do some more traveling while she's still able to.
Sounds like the risk might not be worth the potential reward.
tough call to be sure but how sick would you be if she owned enough to be impacted (talking about her emotions) during some sort of shakeout.
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