8/21/2013 2:25 PM – Is No One Interested in Earning 8% Tax-Free?

Bond prices have been falling and interest rates have been moving up. That shouldn’t be news to anyone.

Tax-free municipal bonds have been hit especially hard. Prices on closed-end funds that invest in those bonds have been hit even harder, with many of the funds that use some leverage to increase returns down the most. Having declined by 10-20% this year, they are often now at the point of selling at discounts to their net asset value that are much greater than normal. This is driving their trailing yields up as high as 8.8% tax free, though most are closer to 5% or 6% tax free.

The problem is that things that fall hard in the stock market always seem to fall more than you expect. So, few buyers have stepped up, afraid of losing more in principal value. I have been in that camp so far, but those funds are starting to look tempting.

Remember though, all but a few of these have no maturity date and hence no guarantee of principal. The few that do trade at unattractive yields. Even with no future guarantee, at some point, the yields may become too good to pass up, even factoring in a general rise in interest rates. Remember too, that these tend to have low volume so sizable positions can take a while to unload.