Muni bond funds poised for 20% gains


Further gains may be in store should the central bank pivot to cutting rates next year, as many now expect. — Reuters

NEW YORK: Municipal (muni) bond funds that use borrowing as a way to juice returns had a banner month in November, surging almost 12%. Some market watchers say that’s only just the start.

Leveraged closed-end muni funds rallied along with the broader market as evidence of slowing job growth and cooling inflation convinced traders that the Federal Reserve’s rate-rise cycle is over.

Further gains may be in store should the central bank pivot to cutting rates next year, as many now expect. But there’s more to the story.

Despite last month’ gains, leveraged closed-end muni funds are still trading at steep discounts to their net asset value. In the past, this has set them up for a market-beating performance.

Taken together, these conditions – combined with the arrival of activist investors looking to push measures that would boost funds’ share value – paint a bullish picture for the sector.

“The backdrop for the closed-end fund muni space is the best I’ve seen in my career,” said Ryan Paylor, a portfolio manager at Miami-based fund manager Thomas J. Herzfeld Advisors, which owns stakes in 21 muni closed-end funds. He predicts fund returns of as much as 20% in 2024.

Closed-end funds raise a fixed amount of money from shareholders in a public offering, unlike mutual funds, which continually sell and redeem shares. — Bloomberg

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