General Stock Investment Strategies/Company News


I own shares of  DWS Municipal Income Trust (KTF). The only information I can find on the Internet about the company is announcements about upcoming dividend distribution and stock price. In the last week the stock price dropped fairly sharply and then began a corresponding rapid recovery. In that same time frame, there was sharp increase in buying and selling. Obviously this had to be the result of some sort of "news", yet nothing out of the ordinary appears upon Googling KTF. Where else could stockholders have gotten real time information to have created such movement?          Thanks.          DBRJ

ANSWER: Hi Dave-
Though it has a ticker symbol, KTF isn't a company really - it's a closed-end mutual fund ("CEF"). CEFs are a somewhat odd any mutual fund, they pool money from a bunch of investors and invest it - in KTF's case, in municipal bonds. But most mutual funds are "open-ended" mutual funds, and you can only buy and sell them at the end of each day, at a price that reflects the value of the investments held by the mutual fund - the "net asset value" (NAV).

CEFs are different...they trade like stocks and the market price is set by supply & demand among investors at any given moment. The price is typically close to, but not exactly at, the NAV - they almost always trade at a discount or premium to NAV, with a discount being more common.

Another thing to know: most municipal bond CEFs use leverage, meaning they borrow money to invest in more municipal bonds. That gives them higher yields (income payouts) when things go well, but also can result in big price drops when interest rates change.

So putting this all together, interest rates have been fluctuating higher over the past few weeks. All bonds, especially, longer-term ones, dipped a bit in price - at one point quite a bit (relative to bonds anyway). That affected mutual funds that hold bonds. But also, you own bonds through an investment that uses leverage - which amplifies any price changes - and one whose market price can vary even more than its NAV, based on whether people feel like buying or selling that CEF on any specific day. It's not at all uncommon with muni CEFs to see amplified drops on bad news about munis, and amplified gains on good news.

That's a long answer but CEFs are a little complicated. You can find out more information about them and the current discount or premium for most CEFs at the website For links to much more detailed info, like all the SEC filings for the fund, see

And if you're looking for a conservative, no-stress income might stick with traditional open-ended mutual funds instead of muni CEFs. The have higher yields at times, but as you've seen they can see very large price swings if interest rates change. It's another layer of risk that you have to be OK with, if you own CEFs.


---------- FOLLOW-UP ----------

Thank you for a very informative reply. Indeed, I wasn't sure you would be able to answer at all.
Your answer would suggest my reviewing interest rates over the last week or so when the KTF price dipped and recovered so rapidly. Would the ten year treasury's interest rate history be relevant or are other bonds more appropriate? It didn't seem to me that it's rate fluctuated down and back up all that dramatically over that short time frame. Can you give me any links to rate histories? I'll be checking your other links too.

I should have mentioned that I don't follow KTF specifically so these are all comments general to muni CEFs...I'd suggest looking at its holdings to decide an appropriate interest-rate benchmark. Probably one of the national muni indices would fit, but what term bonds to look at depends on the fund. Because of the leverage in a muni CEF, it's not as easy - you typically look at the duration of a bond fund to gauge future price fluctuations (e.g. a bond duration of 5.0 means you should expect a drop of about 5% if interest rates move 1% against you; with leverage, you need to know what the leverage is and how it's used).

Another aspect of the muni-CEF pricing related to leverage is that a shift in the difference between short-term rates (that it borrows at) and longer-term rates (that it invests at) can affect the CEF price. That requires some detailed reading about the fund, to understand the obscure securities it's using to borrow money - some form of auction-rate preferred typically - and the interest paid on it. If you can borrow at 1% and invest to earn 4% you earn money. If the earnings remain at 4% but the borrowing rate bumps up to 2.2% - well you can see the issue and potential effect on the price. So it's not enough to look at the bond rates, you also need to know the movement in the interest rates that affect the fund's borrowing cost, to the extent it uses leverage.

I have to throw in what I consider a possible amplifier in this: investors freaking out, or trading at the wrong time. Many CEFs aren't traded all that much and pricing gets lousy when things get exciting. During for example the Lehman blow-up the handful of muni CEFs I follow completely cratered in price - think 10%+ tax-exempt yields, price drops of nearly half. It had to do with uncertainties in the auction-rate preferred market, but it also had to do with investors (and their stockbrokers) freaking out and selling at exactly the worst time. The discounts became huge with some of them, 15%+. Nothing novel here, it's just herd behavior applied to an illiquid market. This to me is something individual investors can watch for, and exploit, or at least - not be caught by. The complexity and added volatility of CEFs means you may be able to wait patiently and buy (or sell) when everyone is doing the opposite, making a little extra money in the process. As an example, I saw one CEF go from about a 1% discount to NAV, to 8% plus, and the mostly recover, during that volatility last week - perhaps attributable to legitimate risks from the leverage, but possibly just people selling when they should have been buying.


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Tad Borek


I am a San Francisco-based investment adviser and attorney.


I opened my investment advisory practice, Borek Financial Management, in 1999, and have been a licensed attorney since 1993.

I received my B.S from Cornell University, and a J.D. from George Washington University Law School.

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