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Municipal Bond Fund ‘Swan Dive’

Posted by Larry Doyle on October 13, 2009 12:08 PM |

Investors have traditionally bought municipal bond funds for income purposes. The tax-exempt status provides real appeal and the default rate on municipals has always been exceptionally low.  Against that backdrop, ‘munis’ have always proven to be less volatile than equities and many other sectors of the bond market . . . until now.

If a picture tells a thousand words, this graph of a Nuveen National Municipal Closed End Fund (ticker NXR) is more than a short story. From the Sense on Cents link to The Wall Street Journal‘s Market Data page, we learn:

That cliff-like drop on the right side of the graph represents approximately a 7% decline in the value of this specific fund culminating in a precipitous 5% drop just yesterday. Part of the decline is explained by the fact that yesterday this fund traded “ex-dividend,” meaning that investors who purchased the fund yesterday are not in line to receive the October dividend. That dividend represents a minor part of the overall decline in the value of this fund.

What does the decline truly represent? The fact that bonds in this $185 million fund declined in value. Why would that happen? The municipalities which had issued these bonds are likely having problems refinancing their debt. What does that mean? Those municipalities will be forced to pay higher rates. And what does that mean? Their outstanding bonds, such as those in this national fund, decline in value. Additionally, the higher rates mean the municipalities will remain hard pressed not to cut services and employees.

Keep your brokers and financial planners honest and compel them to fully explore the credit quality of investments (whether bonds or equities) prior to investing. Otherwise, picture yourself as having invested in this fund a month ago and now eating a 7% loss as you take a ‘swan dive’ off the right side of the above graph.


  • Guy Benstead

    Larry-How about the fact that this Fund was trading at 4% premium to NAV and, based on trade volume, looks like someone unloaded a bunch of stock on Friday (over 2x avg daily volume), and so that it’s now at approx. 3% discount to NAV. On top of that Friday saw a big selloff in long duration assets (30y Tsy was down 2.25% on Friday and 30yr MMD was 10bp wider Thur-Fri)and this is a long duration Fund. So, premium/NAV + large seller + mkt selloff = big price move. Not to say there aren’t credit/volatility issues in Muni market, but market access and refiancing rates are not the issue, and since this Fund has been a clear laggard, don’t extrapolate one Fund’s pain into some underlying problem with Munis. Hope all’s well. Guy

    • Larry Doyle


      Glad you found Sense on Cents. Thanks for your insights. It would be interesting to know why one holder, assuming an institution, would unload that type of size.

      All’s well here. Hope you are doing well also.

  • bob barrett

    We have been investing in this family of funds for many years. Look at the steady prices for the last few years, until a year ago. But the dividends, my concern, have been steady. I assume that the large infusion of funds the last two months were looking for safer havens and now that the DOW seems stable and growing, selling these bland investments are a source of funds for more lucrative, exciting investments. In all the years with these, I have not seen a threat to income stream, which is why we hold these.

  • Polprav

    Hello from Russia!
    Can I quote a post in your blog with the link to you?

    • Larry Doyle

      Please do. Glad you found Sense on Cents.

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