Know This About Closed-End Funds
The portfolio manager of a closed-end fund does not have to worry about redemptions. Therefore, closed-end municipal bond funds don't hold cash to meet redemptions so they can put 100% of their assets into long-term bonds.
Indeed, closed-end muni funds often invest more than 100%: they might buy $1.50 of long bonds for every $1 that fund shareholders put in, borrowing the extra 50 cents in the form of floating-rate notes that pay tax-exempt interest.
If short-term rates are lower than long-term rates, this leverage kicks up the fund's yield. The yield on a closed-end fund also may be enhanced if it trades at a discount to the value of the portfolio.
Also note that leveraged closed-end muni funds can be volatile but they may pay off because short-term interest rates normally are lower than long-term rates.
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Indeed, closed-end muni funds often invest more than 100%: they might buy $1.50 of long bonds for every $1 that fund shareholders put in, borrowing the extra 50 cents in the form of floating-rate notes that pay tax-exempt interest.
If short-term rates are lower than long-term rates, this leverage kicks up the fund's yield. The yield on a closed-end fund also may be enhanced if it trades at a discount to the value of the portfolio.
Also note that leveraged closed-end muni funds can be volatile but they may pay off because short-term interest rates normally are lower than long-term rates.
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posted by Bob Moser at
5:41 PM
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