In a recent report from CEF Insider, it was highlighted that corporate bond-focused closed-end funds with yields of 8% or higher have been a bullish investment for some time now. The current economic conditions in the US, while not booming, have been steadily improving since the pandemic, leading to moderate inflation levels. As a result, the Federal Reserve is expected to lower interest rates in late 2024 or possibly even sooner. These factors have created a favorable environment for corporate bonds and the closed-end funds that hold them, as they have rebounded from the challenges faced in 2022 and have seen a rally throughout 2023 and 2024.
While some bond CEFs may be overbought, corporate bonds as a whole are still oversold, with yields increasing from 3.2% to 5.8%. This has attracted the attention of investors, leading to discounts flipping to premiums in some cases. The largest corporate-bond CEF, the PIMCO Dynamic Income Fund, has seen an influx of investors seeking its 14% yield, causing its discount to NAV to flip to a 12% premium.
Investors have been pouring cash into US high-yield bond funds as hopes for rate cuts grow. However, it is important to be cautious when selecting a bond CEF, as some may not be structured to perform well in a lower rate environment. Three heavily discounted corporate-bond CEFs were introduced as potential options for investors: Brookfield Real Assets Income Fund (RA), Western Asset Inflation-Linked Opportunities & Income Fund (WIW), and PGIM Short Duration High Yield Bond Fund (SDHY). Each fund has its own strengths and weaknesses, with WIW standing out for its history of dividend increases and special payouts.
While RA may seem like the obvious choice due to its high yield, caution is advised as its payouts were cut by 40% late last year. WIW, on the other hand, has a history of special dividends but may be threatened by the current deceleration of inflation. SDHY, although well-managed, may not be the best option for the current moment due to its short-term bond holdings. Ultimately, RA could be a suitable choice until the Fed begins cutting interest rates, at which point a reassessment of investment options will be necessary.
It is important for investors to carefully evaluate all factors before making a decision on which corporate bond CEF to invest in. Past performance and dividend history should be taken into consideration, as well as the structure of the fund and its ability to adapt to changing interest rate environments. While corporate bonds continue to be an attractive investment option, it is crucial to stay informed and make informed decisions based on current market conditions.
