The corporate bond market is currently booming, with well-run closed-end funds (CEFs) presenting an opportunity for investors to tap into big yields at a discount. Business Insider recently acknowledged the favorable environment for bonds, stating that corporate bonds are safer than they have been in years and highlighting record inflows into US corporate bond funds. Investors are shifting towards more corporate bond-focused funds from less risky products, further indicating the attractiveness of this market.
Several corporate bond-focused CEFs are offering yields above 9%, with these yields being well covered by the funds’ investments. Despite a rise in bond yields due to the Fed hiking rates, defaults are still low, with private credit experiencing a 0.3% default rate and investment-grade corporate bonds at around 0.5%. This low default environment allows savvy bond-fund managers to produce high-yielding portfolios with relative ease.
The performance of CEFs like PTY during the low-interest rate environment of the 2010s has demonstrated the ability of fund managers to select winning investments and avoid losers, resulting in strong returns and generous payouts. With higher yields now available and defaults remaining low, funds like PTY could find it easier to maintain their current payouts. While PTY operates with an aggressive trading strategy, other funds like DHY and EVV focus on avoiding defaults, leading to an outperformance of broader corporate-bond indexes.
Currently priced at substantial discounts compared to PTY, DHY and EVV offer more sustainable payouts, with DHY’s 9.2% yield requiring just an 8.5% return on a NAV basis to maintain the payout, and EVV’s 9.8% yield becoming 9% due to its discount. The potential for lower interest rates and bond yields, as hinted by Jerome Powell, could further boost the portfolio values of these funds while their yields remain locked in, potentially leading to higher prices and premiums in the future.
Investors looking to capitalize on the booming corporate bond market through well-managed CEFs like DHY and EVV could benefit from the discounts currently available, making their payouts more sustainable. With the potential for lower interest rates and increased portfolio values, these funds could see significant growth in the future. Overall, the current environment presents an opportunity for investors to access high yields in the corporate bond market through carefully selected CEFs.
