Two Closed-End Contrarian Plays Among Munis

03/30/2020 5:00 am EST

Focus: BONDS

Brett Owens

Chief Investment Strategist, BNK Invest, Inc.

Municipal bonds have held up awfully well so far, and in fact, many of the best-performing closed-end funds (CEFs) this year are of the muni-bond sort, asserts income investing expert Brett Owens, editor of Contrarian Outlook.

Better still? As a general rule, CEFs are income monsters — and thus they’re among my favorite contrarian income plays for retirement accounts.

Eaton Vance Municipal Income Trust (EVN)
Distribution Rate: 5.5%.

Eaton Vance Municipal Income is among the funds in this tax-free crowd. Its 351 holdings are spread among 30 states, Puerto Rico and the District of Columbia, though they’re hardly spread out evenly.

New Jersey, New York and Massachusetts munis alone make up nearly a third of assets, and more than three-quarters of all assets are held in the top nine states and Puerto Rico.

Municipal bonds are a “sneaky” good income play most times. While the occasional default will send the financial world breathless, muni bonds are much safer than these cautionary tales would indicate, and 80% of EVN’s portfolio is at least investment-grade, including 42% in the second-highest debt tier of AA.

As a result of an overdone panic, Eaton Vance Municipal Income Trust trades at a mouth-watering 20% discount. That’s more than triple its five-year average discount of 4.3%.

BlackRock Taxable Municipal Bond Trust (BBN)
Distribution Rate: 6.5%

Every now and again, I field the question: “Why would anyone buy a taxable municipal bond? What’s the point?” And I’ll answer with a question: “What’s the point of holding tax-free bonds in a tax-advantaged account?”

Tax exemption only matters if you can put it to use. If you can’t, then you’re simply eating lower yields for no good reason. Taxable muni bonds, on the other hand, sport higher yields than traditional munis but with relatively similar credit strength.

BlackRock Taxable Municipal Bond Trust is a collection of just more than 150 of these “black sheep” munis, tied to things such as utilities, transportation projects and health measures. And more than 90% of the fund is allocated to investment-grade bonds, which is an awfully safe way to get over a 6% yield, paid monthly.

The result is what, at least at the moment, looks like a steal — a discount of nearly 13% for a fund that typically only trades at 4% below NAV.

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