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November’s Closed-End Fund Theme: Volatility in Muni Bonds

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The story in closed-end funds in November has been the volatility in the municipal asset class. Municipal bond closed-end funds have experienced not only price losses, down 6.5% month-to-date (MTD) as of Nov. 16, but their discounts have widened out 3.53% on unusually high levels of volume. The market is reacting to investors’ perceived risk created by stressed budgets for most municipalities. Additionally, the uncertainties about future tax rates are weighing on the asset class.  

Sector Round Up: Aside from municipal bond closed-end funds discounts, the RiverNorth Closed-End Fund Index (taxable closed-end fund index) widened 1.88% through mid-November. That wasn’t the case with all asset classes in the index. Specialized equity, real estate and hybrid asset classes narrowed 0.52%, 0.58% and 0.63% respectively through the middle of the month. 

Fixed income saw widening across the board with investment grade widening 4.63%, multi-sector bonds widening 4.03% and high yield widening 5.48% MTD. Non-U.S. equity experienced significant widening as well at 2.37% MTD. 

Volume: Municipal bond closed-end funds had an eventful time in the week ending Nov. 16. Over the past 12 months municipal bond closed-end funds have traded approximately $100 million per day.  Between Nov. 9 and Nov. 16, municipal bonds have averaged $371 million in trading daily, hitting a 12-month one-day high of $514 million traded. During that time period municipal bonds have widened 3.7%.

New IPOS: We’ve seen ongoing IPO activity of late. On Oct. 1,First Trust Advisors launched the First Trust High Income Long/Short Fund (FSD), raising $741 million.  The fund primarily invests high yield corporate fixed-income securities. 

On Oct. 27 two funds held IPOs: Western Asset High Yield Defined Opportunity Fund (HYI), whose primary objective is to provide high current income by investing in high-yield corporate fixed income securities, raised $479 million. Guggenheim Build America Bonds Managed Duration Trust (GBAB), which will primarily invest in taxable municipal bonds, raised $340 million.  

Market Wrap-Up: The RiverNorth Closed-End Fund Index returned -2.51% as of Nov. 16, and -0.32% since Sept. 30, 2010. The S&P 500 has returned -0.27% MTD and 3.53% since Sept. 30, 2010.  The Barclays Capital U.S. Aggregate has returned -0.79% MTD and -0.43% since Sept. 30, 2010.