American bonds on stock market perspective dashboard. Stock exchange market charts.
It’s no secret that corporate bonds are booming.But what may be surprising to some people is that we do not have It’s too late to get in. We can still extract significant corporate bond yields at discount prices through a group of well-managed closed-end funds (CEFs).
Even in eternal depression business insider (notorious for its overreaching claims of an inflationary and recessionary crash in 2022) acknowledges the current scary environment for bonds. recently, BI We had to admit that not only is “corporate bonds the safest they’ve been in years,” but this is one of the best bond markets we’ve ever seen.
Demand for bonds has driven “inflows into U.S. corporate bond funds to record levels.” BI While taking notes, financial times Investors “are seeing a significant shift away from lower-risk products and into corporate bond funds,” he said.
The reason is simple. Check out his CEF yields below as he focuses on three corporate bonds.
3 Corporate bonds
These are just three of the many fixed income CEFs with yields above 9%, and these yields are better covered than ever before by the investments in these three funds. Here’s why:
Bond yields soar
Since the Fed began raising interest rates, bond yields (represented here by the average yield on Moody’s Aaa and Baa rated bonds) have skyrocketed. Bond yields typically rise when the risk of default increases, but in this case defaults remain subdued.
Currently, the default rate for private credit is 0.3%, and the default rate for investment grade corporate bonds is around 0.5%. Low-grade corporate bonds, including the lowest-rated junk bonds, have a high default rate of about 4.2%, making it relatively easy for smart bond fund managers to avoid them and build high-yield portfolios.
And we’ve seen that very scenario play out on the ground. Consider his PTY listed above. In the 2010s, when interest rates were much lower than they are now, the fund’s net asset value (NAV, or value of the underlying portfolio) soared. PTY’s portfolio (purple below) outperformed the S&P 500 (represented by its benchmark index fund, orange below) thanks to management’s ability to pick winners and avoid losers.
PTY Total Return
Not only has PTY outperformed its stock price, but it has also maintained its generous dividend, yielding a hefty 9.6% payout as shown in our previous table.
PTY distribution
PTY has performed very well over the past 10 years, paying special dividends (as seen in the graph above) despite low interest rates. Yields are much higher now, and default rates haven’t increased significantly, so PTY will have an easier time maintaining its current dividend than it has for 10 years.
To be honest, PTY was able to do that because of a very aggressive trading strategy that no other bond fund can match. As a result, their performance was not very good. DHY and EVV are both in that category, which is why their long-term returns didn’t match his PTY performance.
But remember what happened to interest rates.
Unlike PTY, which trades aggressively, EVV and DHY have an obligation to limit such aggressiveness, so these funds tend to hold bonds longer. Their secret to success is avoiding defaults. This resulted in DHY (purple below) and EVV (orange) outperforming the broader corporate bond index.
DHY/EVV has superior performance
Still, long-term performance was much lower than PTY. This was not only due to long holding periods, but also because it was constrained by low yields on corporate bonds pre-pandemic. That’s no longer the case, making the fund’s dividends more reliable than they have been in more than a decade.
That leads to the current pricing of these funds.
As you can see in the table above, PTY is priced at a significant premium (30.9% as of this writing), while DHY and EVV both have discounts of 8.2%, making them more interesting at the moment. It has become. PTY’s strong long-term returns were built in a different environment and don’t help us much now as we look to the future. There are high-yield bonds on the market, and these funds are better positioned to capture today’s high yields because they focus on holding high-yield bonds for longer periods of time than PTYs.
Additionally, DHY and EVV have discounts that make payments more sustainable. DHY’s dividend is 9.2%, but thanks to the magic of the CEF discount, management needs to earn just 8.5% on a NAV basis to maintain that dividend. Meanwhile, EVV’s 9.8% yield becomes 9%, again thanks to the discount.
These sound like incredible returns, but as Jerome Powell recently suggested, they are sustainable in a market where bond yields are expected to soar and interest rates to fall.
Lower interest rates (and bond yields) will drive up DHY and EVV portfolio values while yields are fixed. As a result, it may help both funds understand the type of premium that PTY enjoys. If you buy now, you’ll likely be able to buy faster than other investors, giving you the potential to sell these funds at a higher price later.
Michael Foster is the Principal Research Analyst for: contrarian outlook. For even bigger income ideas, click here to check out our latest report.Undying Income: 5 Great Value Funds with Stable 10.9% Dividends.”
Disclosure: None
