This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Closed-end Funds Battered by Market Volatility

NEW YORK ( MainStreet)--Leveraged closed-end funds (CEFs) have been hammered over the past two months, but so far without credit rating implications, according to Fitch. The ratings agency says the notes and preferred stock issued by U.S. CEFs are conservatively positioned and have operated with an ample cushion to maximum leverage thresholds, justifying their continued 'AAA' and 'AA' ratings.

The recent rise in U.S. Treasury yields and speculation surrounding possible changes in the Fed's buying program led to leverage ratio increases and discounts widening for leveraged CEFs, according to Fitch.
[Read: <a target="blank" data-add-tracking="true" href=""><em>Too Many Workers Hate Their Jobs, And That's Hurting the Economy </em></a>]

The municipal CEF sector has been pummeled the most considering the high leverage ratios and long duration of portfolio assets within the class. The average sector NAV fell 13% to a low point on June 24, while secondary market discounts on CEF's common stock widened five times to a low point of -6.6% on June 3, underscoring investor sentiment.
[Read: <a target="blank" data-add-tracking="true" href=""><em>Doctors Called to Act on Financial Abuse of the Elderly</em></a>]

The average leverage ratio for municipal funds rose to 39% on June 24 from 36% at the beginning of May, with at least five CEFs exceeding 45% leverage from June 20 forward. Fitch notes that CEFs operating with new term leverage, such as the Fitch-rated variable municipal-term preferred stock, are required by the governing documents to begin deleveraging their portfolios when ratios exceed 45%. The rating agency has been in contact with the affected fund(s). Taxable CEFs have also suffered in the recent market volatility. Longer duration strategies (such as government bond and preferred stock closed-end funds), as well as riskier portfolios (such as multisector and emerging market) were the most affected, as average NAVs fell 7%-8%.
[Read: <a target="blank" data-add-tracking="true" href=""><em>California has Lower Auto Insurance Rates than 20 Years Ago</em></a>]

Fitch rates approximately $18.0 billion of preferred shares issued by 126 municipal CEFs and approximately $7.9 billion of notes and preferred shares issued by 31 taxable CEFs, all currently in the 'AAA' and 'AA' categories.

--Written by Hal M. Bundrick for MainStreet

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $112.12 0.00%
FB $93.24 0.00%
GOOG $643.61 0.00%
TSLA $220.69 0.00%
YHOO $32.52 0.00%


Chart of I:DJI
DOW 17,084.49 +33.74 0.20%
S&P 500 2,014.89 +15.91 0.80%
NASDAQ 4,830.47 +19.6820 0.41%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs