Federated Premier Municipal Income Fund NYSE: FMN

Product Type Asset Class Category
Closed-End Fund Fixed Income Muni National
As of 12-31-2017

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

Yields on intermediate- and short-term Treasury securities increased, while yields on long-term Treasury securities declined during the fourth quarter of 2017 amid ongoing moderate U.S. economic expansion, incremental tightening of monetary policy by the Federal Reserve, continued modest inflation and enactment of federal tax cuts in December. Two- and 10-year Treasury yields increased by 40 and 7 basis points, respectively, while the 30-year Treasury yield decreased by 12 basis points. Municipal bond yields followed a similar pattern over the quarter, after some bouts of volatility related to a record surge in municipal issuance late in the year ahead of the effective date for tax-policy changes. The surge in supply was met with strong demand, thus allowing yields on intermediate- and long-term municipal bonds to decline more than was observed in the Treasury market. Municipal Market Data (MMD) 2-year AAA tax-exempt yields increased 56 basis points, while the 10- and 30-year AAA tax-exempt yields decreased by 2 and 30 basis points, respectively.

The S&P Municipal Bond Index posted a return of 0.64%. The 3-year component of the index returned -0.92%, while 10-year component returned 0.60% and the portion of the index maturing in 22 years and longer returned 2.14%. The AAA/Aaa component of the index returned 0.40%, the A-rated component returned 0.87% and the BBB-rated component returned 1.55%. The S&P Intermediate Municipal Bond Index posted a return of 0.11%. The S&P High Yield Municipal Bond Index returned 0.96%, but rose to 2.00% 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 5.21% or 8.63% (based on a 39.6% tax bracket) on a taxable-equivalent basis. The fund posted a total return of 1.48% 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 the effect of leverage, enhancing income to shareholders over the period. The fund’s total return at market price was -3.26%, as the fund’s discount of market price to NAV widened from 2.84% on Sept. 30, 2017, to a discount of 7.44% on Dec. 31, 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 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.