Closed-End Bond Funds

Morgan Stanley

John Duggan

Research

78 Pages

Morgan Stanley Wealth Management examines opportunities and risks across taxable and municipal closed end bond funds as investors chase yield in a low rate environment. The paper highlights tightening municipal valuations, rising LIBOR linked borrowing costs, and taxable bond CEF discounts still averaging 4.9%.

Key Takeaways

Discount Opportunities Persist: Taxable bond CEFs traded at an average 4.9% discount with 8.1% distribution rates, though aggressive credit exposure appeared less attractive after the 2016 rebound.
Municipal Valuations Tighten: National municipal CEF discounts narrowed from 5.9% to 0.9% between March 2015 and September 2016, increasing sensitivity to future rate volatility.
Leverage Costs Rising: More than 85% of municipal CEFs used leverage, while higher LIBOR and SIFMA borrowing costs pressured earnings and increased dividend cut risk.
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