Federated Premier Municipal Income Fund NYSE: FMN

Product Type Asset Class Category
Closed-End Fund Fixed Income Muni National
As of 09-30-2018

Highlights

  • The fund underperformed its index at net asset value (NAV) as the fund’s leveraged strategy amplified price declines as municipal market yields rose during the quarter
  • A widening discount of share price to NAV—which was common for many leveraged municipal closed end funds in the third quarter—further depressed performance relative to the index

Looking Back

Municipal bond yields increased with Treasury yields amid the continued strong U.S. economic expansion and further tightening of monetary policy by the Federal Reserve (Fed). Municipal Market Data (MMD) 2-, 10- and 30-year AAA tax-exempt yields increased by 33, 12 and 25 basis points, respectively. Yields on 2-, 10- and 30-year Treasury securities increased by 29, 20 and 22 basis points, respectively. During much of the quarter, losses in emerging markets and U.S. trade policy risks seemed to restrain Treasury yields from rising. Near the end of the quarter, each of these risks eased—emerging market performance improved and the U.S. reached a new trade agreement with Canada and Mexico—allowing generally strong U.S. economic data and the ongoing Fed policy normalization to drive U.S. bond yields higher.

The S&P Municipal Bond Index posted a loss of 0.14% for the quarter. The 3-year component of the index returned -0.02%. The 10-year component returned +0.10% and the portion of the index maturing in 22 years and longer returned -0.51%. The AAA- and A-rated components of the index were down 0.30%, 0.13%, respectively, while the BBB-rated component returned +0.24%. The S&P Intermediate Municipal Bond Index was down 0.01%. The S&P High Yield Municipal Bond Index returned 1.07%, but rose 0.48% when excluding outperforming Puerto Rico bonds.

Performance

  • The current dividend yield based on market price was 5.52% at quarter-end, or 8.06% on a taxable equivalent basis using the top 37% marginal income-tax rate
  • The fund posted a loss of 0.60% based on NAV, underperforming the S&P Municipal Bond Index
  • The fund’s total return at market price was lower at -2.88%, as the fund’s discount of market price to NAV widened from 10.10% on June 30 to 12.00% on September 30

Performance Contributors

  • A conservative duration and overweight allocations to mid- and low-quality bonds contributed positively to relative performance before the effects of leverage

Performance Detractors

  • The fund’s leveraged strategy contributed negatively to relative performance compared to the index, as leverage amplified price declines amid rising municipal bond market yields

How We Are Positioned

The fund began the third quarter with a pre-leveraged duration short to the S&P Municipal Bond Index in anticipation of further upward pressure on market interest rates. The fund maintains significant overweight allocations to bonds A-rated and lower, including below-investment-grade securities.