Grant’s: Better at a Discount

We have been “paid-up subscribers” to Grant’s Interest Rate Observer ever since we heard Baupost Group’s Seth Klarman recommend that young investors read “every word” that Jim Grant publishes. 

As a not-so-young investor today, we were flattered to be featured in this Grant’s Interest Rate Observer piece on municipal bonds (click the image below for access).

The article briefly outlines our investment thesis for this compelling asset class, which we explored in our recent mid-year letter:

We added to our basket of closed-end funds (CEFs) in every month of the first half through May, as yields increased and discounts widened. Whileequity CEFs remain expensive, the median fixed-income CEF is trading near a double-digit discount to NAV today, a level only exceeded by a fraction of observations over the past quarter-century. Today’s fixed income discounts are even wider in the tax-exempt sector, where municipal CEFs have only been cheaper 5% of the time. With the Fed hiking the short end of the curve, the move in long-term rates appears to have stalled. If economic activity rolls over, bond yields should follow. We are positioned accordingly, with our highest allocation to tax-exempt CEFs at their widest discounts in history. Now we wait.

Thanks to the team at Grant’s for allowing us to share this piece.

Click on the image below for access to the article.