With interest rates trending up recently, muni bond closed end funds (CEFs) have been trending down.
Not only the NAV is down, but in most cases the stock price has gone down even more than the NAV (e.g., GBAB, BBN, AFB, BKN, MUS).
Consequently, many Muni CEFs are selling at discounts in the range of 5 - 10 percent below NAV.
I'm expecting that when the Fed finally raises rates, these CEFs will be a good buy -- especially if there is a panic selloff of bond funds.
I'm expecting after the Fed moves and the market settles a bit, that long bond interest rates will trend down, and muni funds will come back up.
So not only will we get some appreciation if long bond rates go down, but also the discount will likely narrow and that will be another positive factor.
I really like buying CEFs with steep discounts to NAV. It's nice buying dollars for 90 to 95 cents.
Why do I expect long bond rates to go down after a Fed increase?
The Fed can only directly raise short rates. Long rates are set by the market.
That said, the Fed can participate in the market for long bonds as well and can, for example, push rates down by buying bonds driving prices up a little. QE is an example of this.
While the Fed claims it's not planning to expand it's portfolio much more, they aren't shrinking it either.
Given the Fed has a bond portfolio in the trillions, they get a boat load of cash coming in from coupons and from bonds that mature.
I get an email feed from the Fed every week showing major bond purchases -- presumably putting the cash from from their portfolio back into the market. So they are still buying at long end.
Plus, many of the major country sovereign bonds are at negative interest rates, so US treasuries with 2 or 3 percent interest are attracting foreign money -- driving bond prices up and interest rates on long bonds down.
Another factor is the economy is expanding capacity slowly, so there isn't a whole lot of demand for commercial business loans.
So, in general, I expect short rates to go up very slowly as the Fed raises once a year for the next couple years. And long term rates will stay down.
In fact, I wouldn't be surprised if long rates go lower in 2017/18 as US bonds fall more in line with other major country's debt.
The yield curve will probably flatten.
But then predicting interest rates in always an iffy business.
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