Municipal funds are compelling vehicles for closed-end fund investors. These funds offer relatively high yield – a sector average of 5% (and even higher on a tax-equivalent basis) but also resemble risk-free assets as they tend to co-move with Treasuries.

We looked at average returns of Muni CEFs on 17th of May when the S&P 500 fell 1.8%. We show below that the average fund returned +0.3% on the day (and a similar figure on an NAV basis).

We see two main takeaways for investors:

  • Muni CEFs in a normal market environment tend to be negatively correlated with equities, although the rally in Munis will be much lower than the fall in equities.
  • In a large sell-off (think VIX at 25+) we expect Muni CEFs to be positively correlated with equities as we expect discounts to widen more than the growth in NAVs, so investors need to take care.

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