Federated Premier Municipal Income Fund NYSE: FMN

Product Type Asset Class Category
Closed-End Fund Fixed Income Muni National
As of 09-30-2017

The fund is a closed-end fund with common stock that trades on the New York Stock Exchange (ticker: FMN). The fund’s objective is to provide income exempt from federal income tax, including the alternative minimum tax (AMT). The fund invests in long-term, non-AMT municipal securities, a minimum 80% of which carry investment-grade ratings. The fund employs leverage in the form of two series of highly rated preferred shares to enhance dividends to common shareholders.

Market Environment

Treasury yields rose modestly during the third quarter of 2017 amid indications of improving U.S. and global growth, heightened prospects for stimulative U.S. tax policy and the beginning of gradual balance-sheet reduction by the Federal Reserve. Continued low inflation and bouts of risk aversion related to potential conflict between the U.S. and North Korea offered countervailing downward pressure on market yields during the quarter. Two-year Treasury yields increased by 10 basis points, while 10- and 30-year Treasury yields both increased by 3 basis points. Municipal bond yields followed a similar pattern, with steady inflows into municipal bond funds and modest new issuance supporting some outperformance for short- and intermediate-term municipal bonds relative to Treasuries. Municipal Market Data (MMD) 2-year AAA tax-exempt yields decreased 6 basis points, while 10- and 30-year AAA tax-exempt yields increased by 1 and 5 basis points, respectively.

The S&P Municipal Bond Index posted a return of 0.99%. The 3-year component of the index returned 0.61%, the 10-year component returned 1.18% and the portion of the index maturing in 22 years and longer returned 0.86%. The AAA/Aaa component of the index returned 0.72%, the A-rated component returned 1.46% and the BBB-rated component returned 2.08%. The S&P Intermediate Municipal Bond Index posted a return of 1.07%. The S&P High Yield Municipal Bond Index posted a loss of 0.08%, but rose 2.26% when excluding sharply underperforming Puerto Rico bonds.

Performance

At the end of the quarter, the current dividend yield of the fund based on market price was 4.98% or 8.24% (based on a 39.6% tax bracket) on a taxable-equivalent basis. The fund posted a total return of 1.96% based on its net asset value (NAV), outperforming the S&P Municipal Bond Index. The fund’s outperformance resulted from its overweight exposure to mid- and lower-quality bonds, favorable security selection and favorable positioning along the municipal yield curve, in addition to the income advantage from the fund’s leverage during a period when market interest rates held to a narrow range. The fund’s total return at market price was 1.95%, comparable to its return at NAV, as the fund’s discount of market price to NAV changed little from 2.80% on June 30, 2017, to 2.84% on Sept. 30, 2017.

The fund held its monthly dividend per share steady at $0.061 during the period. The fund’s dividend is affected by the cost of leverage and the level of interest earnings from its portfolio.

Strategy

Investment strategy integrates management’s views on interest-rate and credit cycles. Portfolio managers attempt to add incremental return through management of duration and credit risk, allocation among credit sectors and along the yield curve, and selection of bonds. The fund’s use of leverage seeks to enhance its potential for income generation. Changes in the fund’s cost of leverage affect the level of income available to common shareholders. The leverage employed increases sensitivity of the fund’s NAV to changes in market interest rates. Portfolio managers intend to maintain a portfolio structure that will seek to maximize fund earnings, subject to prudent diversification, requirements related to the credit ratings of the fund’s various preferred shares and achievement of competitive total return.