I have said it often enough. We are in a “Borrower’s Paradise” and a “Fixed-Income Investor’s Hell.” For people and institutions that need yield and a cash-flow you can just about “Forget about it.” With the 10 year Treasury closing at 0.64% on Friday, we find the Bloomberg Treasury Index, with a 7.06 year duration, yielding 0.496%. You might as well be with Dante in his Inferno.

Corporate bonds are little better. No one is getting paid for the “risk premium” now with Bloomberg’s Corporate Bond Index, with a duration of 8.48 years, yielding 2.172% which offers up a 1.676 point differentiation to Treasuries. So much for providing extra yield for the extra risk.

Even in High Yield, the reward is skimpy. Bloomberg’s High Yield Index, with a 4.20 year duration, only yields 6.773%. The pay-off for “credit risk” is hardly worth the risk, in my estimation.

Having said all of this, I do not expect anything to get any better, but only continue to shrink as both people, and institutions, scramble to find yield in any manner possible. Even with the tremendous amount of new issuance, I do not see a change. The demand is still way larger than the supply and the supply will begin to dry up as companies take advantage of our historical low yield environment and use up their fire power.

Currently, corporations are re-financing everything in sight and adding debt to their balance sheets in the process. However, the longer that we have such incredibly low yields then issuance and re-financings, in both the bond and loan markets, will begin to taper off. You may think that yields will head higher, in this environment, but that is not my expectation as the central bank of the United States, the Fed, controls and dominates all of the Fixed-Income markets.

The amount of money they have at hand is limitless. It can be created with keystrokes, and then deployed as they see fit. They are buying ETFs, investment grade Corporate Bonds, High Yield Bonds, loans and soon Municipal Bonds. They are entering markets that they have never entered before, as the U.S. government increases its debt, and as American borrowers take advantage of the situation. The Fed, in my view, will continue this dynamic for years, if not decades, as the world’s central banks have all learned a new set of tricks that may even drive American yields into negative territory, as some point in time.

Last year investors were bailed out by the tremendous increase in the equity markets. I do not expect any such grand increase in prices this year. I do not expect any giant correction either, I want to state. In my opinion, once the Fed stepped up to the plate the markets, all of the markets, changed dramatically and the historical valuations of the Fed, and economic data, to predict the future, melted away, into the past.

This has also taken a lot of pressure off of Congress. Why does Congress need to lend money to Municipalities and Corporations, because of our pandemic, when the Fed can buy up their debt and help finance them with the flick of a switch and no voting needed. The term, “Lender of Last Resort,” has taken on a new meaning with the “Banking System” being the old definition and “Every American System” replacing it.

Yet for investors, “What to do, what to do.” I have suggested, and continue to suggest, closed-end funds as about the only decent alternative left. Find the ones that pay monthly and look like they will continue to pay, as this often overlooked sector of the markets continues to present opportunities not to be found in other segments of the markets, in my opinion. Even here, however, I would not be surprised to find opportunities shrinking as investors take advantage of the double digit yields available and push up the prices causing the attractive yields to evaporate.

Sure, you can point to leverage, and the various markets that underpin the funds, and that NAVs than can shrink or the dividends that can be cut and these funds are certainly not without risk but then, with the possible exception of U.S. Treasuries, almost all other investments have risk of one kind or another. The question then becomes “Risk versus Reward, and it is my view that some, not all, of the closed-end funds continue to offer you a “Reward” for your “Risk.”

The monthly payments that some of these funds offer are also a boon for many people and institutions as retirees, university endowments, pension funds and the like have monthly expenses that must be balanced against monthly income. These funds also have diversified portfolios in bonds, energy, Real Estate, loans, Municipal Bonds, and a wide variety of targeted areas. Yes, as in any individual stock paying dividends, the dividend can be cut but the diversity of the portfolios gives you some addition protection, in my view.

One particularly interesting part of the closed-end fund sector are those backed by bonds, of one sort or another. As many of you know, a company can cut their dividend at will, at some Board meeting, but they cannot cut their bond payments without seriously impacting the company and putting it in some kind of reorganization or bankruptcy. Consequently, the closed-end funds backed by bond payments provide an additional level of protection to the holders of those closed-end funds.

No yield in sight. I offer a solution today for your consideration. All of the choices are yours.

Carry on!

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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2020-06-28