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Yield hunting in CEFs: Strong L/T income support but beware of N/T price risks (BoA)

There is a table with CEF picks. The report is accessible to Merrill Edge clients.

Yield hunting in CEFs: Strong L/T income support but beware of N/T price risks
Closed-End Funds
High quality, stable dividends, deep discounts

by Elias Lanik, BoA ETF and CEF analyst, published 6AM 8/3/2020 

Following unprecedented volatility in the first few months of the year driven by
leveraged exposure to markets impacted by the coronavirus pandemic and the
challenges of pricing its impact on the economy while accounting for global fiscal and
monetary support, the closed end fund market has largely stabilized albeit at generally
deeper discounts. Higher quality sectors like the Muni CEFs have fared the best while
lower quality sectors have lagged. Year to date performance has ranged from the Muni
CEFs which have eked out an average 2.5% stock price total return to the Senior Loan
CEFs which have lost nearly 14% on average. Given the speed of the recovery amid
continued coronavirus uncertainty we think that it is reasonable to expect over the near
term a potential retracement of at least some of the four month rally in risk markets. We
would view risk market retracements and accompanying CEF discount widening as
potential CEF buying opportunities for long term investors. Where possible, we prefer
CEFs that tilt toward higher credit quality relative to peers in their category, stable
dividends and deep discounts.
Broadly supportive yield demand & leverage costs
Two broadly supportive factors for CEFs that we see in the current market are derived
from the same economic reality of current and likely continued low interest rate
environment. Low interest rates is supportive due to the resulting strong demand for
high-yield oriented securities like CEFs as well as due to the resulting low CEF leverage
costs which in turn supports their high yields. With the Fed funds rate at zero and our
expectation for it to remain there for some time, income-oriented investors looking
beyond bonds for yield should consider CEFs that offer income opportunities at a
significant markup to bonds owing mainly to leverage and discounts but also active
management and the flexibility to consider securities with liquidity premiums. Muni
CEFs currently yield an average of 4.5%, 7.2% for Preferred CEFs and 9.0% for Senior
Loan CEFs. Yields across all Buy-rated CEFs range from the conservative 3.6% for higher
quality, lower leverage funds to as high as 11.2% for lower quality, higher leverage
Near term stock price action risk vs. Income as L/T risk
Over the near term - and generally over short timeframes - the main risk to CEF
investors comes from stock price action. And with Feb/Mar CEF stock price volatility still
fresh in investor minds, the focus has clearly been on these near term risks. For long
term CEF investors, however, regular bouts of stock price volatility are to be expected.
Given that long term average annual returns for CEFs tend to gravitate towards yield,
the real long term risks are associated with income. Currently these risks exist in the
potential for bonds being called and capital being re-invested at the lower prevailing
market rates. In the current market given the downturn in the overall economy and the
pressure this places on issuers we also include the potential for defaults as an important
risk for long term CEF investors.

2 Replies
Frequent Contributor

Re: Yield hunting in CEFs: Strong L/T income support but beware of N/T price risks (BoA)


Thanks, B-man



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Explorer ○○

Re: Yield hunting in CEFs: Strong L/T income support but beware of N/T price risks (BoA)

I should sue for copyright!

Just kidding.  

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