Weekly Commentary | June 30, 2024 | Muni Buy Options. BANX One Of The Few Buys In Taxables
Summary
US stocks had a strong first half of the year, up ~15%, one of the best starts in four decades.
Banks saw a boost in performance, with KBW Bank Index up 10.5% for the year.
Muni CEFs are showing significant discounts, providing opportunities for investors to capitalize on the market.
Muni CEF buy options and BANX commentary.
Macro Picture
US stocks were once again higher for the week and finished the first half up ~15%, one of the best starts to a year over the last four decades. Three out of the last four first halves of the year were up around 15-16%. All finished higher.
Edward Jones notes:
Fast first halves have not typically been indicative of markets that burned all their gas early. In fact, in the 11 years in which stocks were up 10% or more at the end of June, the average full-year return went on to be 29%.
Good news boosted banks this week and the KBW Bank Index (KBW) is now up 10.5% for the year. At the same time, the regional bank index remains down over -8.5%.
Core PCE came in as expected at +2.6% y/y for May, the lowest since May 2021. That was also the first time in this economic cycle that inflation topped the Fed's target of 2.0% inflation.
Housing prices continue to befuddle economists. They were up 0.4% on the month for the fourth straight month. Shelter costs have been forecasted to fall for some time but have proven stickier than the Fed has anticipated.
Lastly, yields crept up towards the end of the week following the first presidential debate where the probability of President Trump being re-elected to the office rose considerably as President Biden appeared to have a poor performance.
The theory is that a President Trump is bad for inflation given the higher chances that he'll have a Republican congress to rubber stamp all his spending wants. The yield curve steepened as long-rates moved up and short-rates remained coupled to the Fed and markets schedule.
CEF Market Review
Discounts continue to tighten with taxable down to -2.67%, the tightest level in nearly two and a half years. Munis saw a significant bump and are now with an 8-handle. The average muni CEF is trading at an -8.5% discount. That is nearly six points of tightening since October. A massive tailwind.
Since Halloween, the VanEck CEF Municipal Income ETF (XMPT) has outperformed the passive municipal bond benchmarked ETF (MUB) by 16.5 points.
On a one year basis, the muni CEF ETF is now ahead of the passive despite the leverage headwind it has experienced and the discount widening.
However, on a 3-, and 5- year basis, the CEF index has a lot of catching up to do.
3-Year:
5-Year:
The five year chart above shows the cyclicality of the closed-end fund relative to a non-leveraged,
There are still a ton of deals in that space. The activism should also be a massive tailwind as well since most of the taxable funds are trading closer to par and not conducive to Saba or another activist building a position.
Saba recently started to accumulate BNY Mellon Strategic Municipals (LEO) and already has built a 6.3% position. The fund is still within half a point of its 52-week discount average whereas the average muni CEF is more than 5 points higher (tighter) than it.
Rotating from funds that have tightened by 6+ points to funds like this that have not tightened much at all makes a lot of sense, even though you have to pay taxes on the move.
A few more muni CEF TACTICAL options would be:
Keep reading with a 7-day free trial
Subscribe to Yield Hunting to keep reading this post and get 7 days of free access to the full post archives.