Federated Premier Municipal Income Fund NYSE: FMN

Product Type Asset Class Category
Closed-End Fund Fixed Income Muni National
As of 03-31-2018

Highlights

  • The fund underperformed its index at net asset value (NAV) due to its leveraged strategy in a rising rate environment, and further underperformed at market price as the discount of price to NAV widened
  • The fund maintains a pre-leveraged duration that is short relative to the index and maintains overweight allocation to mid & lower quality bonds

Looking Back

Municipal bond and Treasury yields climbed higher as the Federal Reserve (Fed) raised short-term target rates at its March meeting amid the ongoing U.S. economic expansion. Concern that the Fed may excessively tighten monetary policy and the prospect of escalating trade conflicts as the Trump administration proposed targeted tariffs caused stock markets to decline and Treasury and municipal yields to retrace somewhat from their highs during the quarter. The new issuance of municipal bonds fell about 30% during the first quarter compared to the same period last year as the acceleration of deals into the fourth quarter of 2017 to beat the tax legislation left a diminished calendar of financings. Demand for municipal bonds was somewhat muted as banks and insurance companies reacted to the large corporate tax cut by selling a portion of their municipal holdings. Also, individual investor demand for bonds and municipal mutual funds was muted as total returns turned modestly negative.

Yields on AAA-rated 2-, 10- and 30-year municipal securities increased 9 basis points, 44 basis points and 41 basis points, respectively. Yields on 2-, 10- and 30-year Treasury securities increased 38 basis points, 33 basis points and 23 basis points, respectively.

The S&P Municipal Bond Index posted a loss of 0.92%. The 3-year component of the index posted a return of 0.15%, while the 10-year component returned -1.58% and the portion of the index maturing in 22 years and longer returned -1.27%. The AAA/Aaa component of the index returned -1.14%, the A-rated component returned -1.08% and the BBB-rated component returned -0.65%. The S&P Intermediate Municipal Bond Index posted a return of -1.09%. The S&P High Yield Municipal Bond Index returned 1.29%, but rose 0.43% when excluding sharply outperforming Puerto Rico bonds.

Performance

  • The current dividend yield based on market price was 5.48% at quarter-end, or 8.70% based on the top 37% marginal income-tax rate
  • The fund posted a total return of -1.43% based on its NAV, underperforming the S&P Municipal Bond Index
  • The fund’s total return at market price was -3.56%, as the fund’s discount of market price to NAV widened from 7.45% on Dec. 29, 2017, to a discount of 9.55% on March 30, 2018

Performance Contributors

  • Overweight allocations to outperforming mid- and low-quality bonds contributed positively to relative performance

Performance Detractors

  • The fund’s leveraged strategy accounted for all of the underperformance during the quarter, as leverage amplified bond-price declines due to market interest rates increasing

How We Are Positioned

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