Published Mon, 23 Jan 2017 13:20:01 -0500 on Seeking Alpha
Since the trough reached in the summer of last year, 10-year Treasury yields are over 100 basis points higher. A rising interest rate environment tends to put pressure on prices and net-asset values of fixed-income funds. In this brief article we take a look at the High-Yield Muni sector and see whether we can find funds that are poised to cope better with a potential rise in yields while maintaining attractive distribution yields.
What is the relationship between a Muni fund NAV and interest rates? In order to get an intuitive feel for this relationship we plot the weekly NAV of the Nuveen Municipal High Income Opportunity Fund (NYSE: NMZ) against 10-year Treasury yields. We can see that as interest rates rise, the NAV falls.
While rising interest rates usually tend to weigh down the NAVs of fixed-income funds, there are several mitigants available to investors.
Fund managers can choose whether or not to hedge interest-rate exposure. Staying with the Nuveen funds for the moment, we can see from their December holdings statement that there was $378m of paid interest-rate swaps across 10 funds. Ignoring the bond/swap basis, this hedge will partially mitigate further rises in interest rates. Duration will tend to decrease as interest rates rise. In other words for each basis point increase in yields, the sensitivity of bonds to a further rise goes down. High-yield bonds tend to be less sensitive to interest rate rises because there is a larger "spread cushion"... Read more
|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|MFS HIGH INCOME MUNICIPAL TRUST||5.22||0.0||0.00||0.29||5.05|
|PIONEER MUNICIPAL HIGH INCOME TRUST||12.28||0.0||0.00||0.00||4.59|
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