Federated Premier Municipal Income Fund NYSE: FMN

Product Type Asset Class Category
Closed-End Fund Fixed Income Muni National
As of 06-30-2018

Highlights

  • The fund outperformed its index at net asset value (NAV), but underperformed at market price as the discount of price to NAV widened.
  • The fund cut its monthly dividend in June to $0.054 cents per share, partly due to rising leverage costs.

Looking Back

Municipal bond yields were little changed while Treasury yields moved higher amid continued U.S. economic expansion, somewhat higher inflation and another increase in short-term target rates by the Federal Reserve. Yields on 2-, 10- and 30-year Treasury securities increased by 26, 12 and 2 basis points, respectively. In contrast, Municipal Market Data (MMD) 2- and 30-year AAA tax-exempt yields each decreased by 1 basis point and the 10-year AAA tax-exempt yield increased by 4 basis points. Modest gross new issuance of municipal bonds combined with generally stable demand to support outperformance of municipal yields relative to Treasury yields. Gross new issuance of municipal bonds through June 2018 was down nearly 25% compared to the average level at midyear over the prior three years. The enactment of federal tax reform in 2017 accounts for much of the decline in new issuance this year. The federal tax bill eliminated tax-exempt advance refunding bonds and prompted a surge in municipal new issuance late last year, leaving a diminished calendar of financings.

The S&P Municipal Bond Index returned 0.91% for the quarter. The 3-year component of the index posted a return of 0.60%, the 10-year component returned 0.78% and the portion of the index maturing in 22 years and longer returned 1.39%. The AAA-, A- and BBB-rated components of the index returned 0.67%, 0.89% and 1.42%, respectively. The S&P High Yield Municipal Bond Index returned 2.99%, but rose 2.31% when excluding sharply outperforming Puerto Rico bonds.

Performance

  • The current dividend yield based on market price was 4.89% at quarter-end, or 7.76% on a taxable equivalent basis using the top 37% marginal income-tax rate.
  • The fund posted a total return of 1.07% based on its NAV, outperforming the S&P Municipal Bond Index.
  • The fund’s total return at market price was lower at 0.57%, as the fund’s discount of market price to NAV widened from 9.55% on March 30, 2018, to 10.10% on June 30, 2018.

Performance Contributors

  • Overweight allocations to outperforming mid- and low-quality bonds contributed positively to relative performance.
  • The fund’s leveraged strategy contributed modestly to the outperformance as leverage enhanced fund income amid generally stable market yields.

Performance Detractors

  • Sector allocation detracted from relative performance, partly due to holding no allocation Puerto Rico bonds or the most speculative subordinated tobacco securities, each of which experienced price increases from distressed levels during the quarter.
  • The fund cut its monthly dividend to $0.054 cents per share in June from $0.061 in May. The fund’s dividend is affected by the cost of leverage—which is linked to short-term interest rates that have risen with the Fed’s tightening of monetary policy—and the level of interest earnings from its portfolio.

How We Are Positioned

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