Replies to post #59151 on Biotech Values

[DewDiligence]

[OT] Re: Closed-end muni funds

>Now the selling itself could drop NAVs of all the funds, but that hits both levered and unlevered funds. The impact will be greater on the levered funds of course.<

Because non-leveraged funds don’t have auction-rate loans, they would not be forced to sell bonds even in the worst-case scenario where liquidity in the auction-rate-loan market dried up completely. An NAV hit in a non-leveraged fund from fallout in the muni market itself would be in the form of unrealized losses and these losses would likely be temporary.

For leveraged muni funds, on the other hand, the NAV hit from forced bond sales would be in the form of realized losses that would not be recoverable even if the muni market subsequently returned to normal. In other words, in the worst-case scenario, the damage to leveraged funds would be permanent and it might be severe.

We are talking about low-probability events here, but some of the closed-end muni funds are leveraged to such a degree that a substantial loss of capital could ensue if these events were to occur. I don’t think the higher dividend payments in the leveraged funds relative to the non-leveraged funds pays you enough for assuming this risk.