Nuveen Quality, Inc.me Municipal Fund Inc. (AMEX:NQU)

Gedunken (49.72) Submitted: 3/3/2008 1:25:24 PM : Start Price: $10.15 NQU Score: +31.44

The overreaction to the potential failure of the monoline insurers to keep their AAA rating is causing significant mispricing of the bonds. The long term default rate for municipal bonds is vanishingly small. For most bonds, the insurance provided was merely an unnecessary expense since even the lower rates muni bonds have historically had a lower default rate than the same or even higher rated corporate debt. This is why Buffet is so interested in peeling off these insurance premiums from the Ambacs of the world--it is almost a risk free return for the insurers which is partially why they had the AAA ratings in the first place before they screwed it up by insuring much riskier mortgage bonds.

Right now, you can muni bonds with returns around 8% on a tax adjusted basis. You can buy closed-end muni funds trading at 10% discounts to NAV. If you want to reduce you risk, you can buy a non-leveraged AA+ national muni CEF. For instance, according to ETFConnect, the unleveraged NXQ fund from Nuveen is trading at a 3.1% discount to NAV with a yield of 4.82% on AAA rated bonds with an average duration of 5.44 years. That is a taxable equivalent yield of 6.7%, well above what I expect the average return will be from equities in the next couple years. If you can stand a bit more risk, the leveraged NQU fund from Nuveen is providing a 7.79% effective taxable return on largely AAA rated bonds with little exposure to the insurance issues.