Weekly Review: High-Yield CEFs

About: Pioneer High Income Trust (PHT), Includes: AIF, EAD, HIO, HYB, HYG, MPV, NHS, TLT
by: Arbitrage Trader

Review of where high-yield, closed-end funds and their benchmark ended the week.

Comparison with the iShares 20+ Year Treasury Bond ETF (TLT) and spread review.

Recap of news related to the sector.

Comparison among the funds using several important metrics.

Pair trade idea for those interested.


The opportunities in closed-end funds over the last few months caught the eye of many investors. Most of these products are designed to provide a steady stream of income, usually on a monthly or quarterly basis, as opposed to the biannual payments provided by individual bonds. And this feature continues to attract market participants even when the overall market looks unstable.

In spite of CEFs being mostly of interest to income investors, we have found our path to approach them as active traders and we are constantly monitoring them. As a testament to this, you will be kept up to date with Weekly Reviews such as the one below.

The Benchmark

Source: Barchart, iBoxx $ High Yield Corp Bond iShares

Over the past week, the main index iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG) has increased its price by $0.15. At the beginning of July, we saw repulsion from the bottom which was the start of a prolonged positive performance. The recent behavior of the main index seems like a reason to see a test of the resistance levels around $86.20 and $86.55. On the chart below you can notice the price trading range which was formed since the beginning of the year.

Source: Barchart, iBoxx $ High Yield Corp Bond iShares

If you still do not have any high-yield CEFs in your portfolio, I would like to spend some time covering several advantages of high-yield bonds and closed-end funds, which invest in this asset class. As the high-yield sector generally has a low correlation to other sectors of the fixed-income market, along with less sensitivity to interest rate risk, an allocation to high-yield bonds may provide portfolio diversification benefits. In addition, high-yield bond investments have historically offered similar returns to equity markets but with lower volatility.

Statistical Comparison And Spread Review Of The Sector

The spread is simply the compensation a bond investor receives over the risk-free rate, which in this case is the U.S. Treasury rate. On a weekly basis, we notice a slight increase of 0.12 bsp. As we can see, the current levels are significantly lower compared to the ones of the financial crisis.

Source: YCharts, US High Yield Master II Option-Adjusted Spread & iShares iBoxx $ High Yield Corporate Bond ETF

Below, you can find a statistical comparison between the iShares iBoxx $ High Yield Corporate Bond ETF and the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT). As discussed, we observe a low correlation between these two sectors. It is only 0.23 points for the last 200-day period:

Source: Author's software

The News

Source: Yahoo News, High Yield Closed-End Funds News

Two funds from the sector announced their regular distributions:

  • Apollo Tactical Income Fund, Inc. (NYSE:AIF) announced the declaration of its distribution of $0.1070 per common share.
  • Wells Fargo Advantage Income Opportunities Fund (NYSEMKT:EAD) will distribute $0.0520 per common share.

Review Of High-Yield CEFs

1. Lowest Z-Score:

Source: CEFConnect.com

The above sample shows the most statistically undervalued closed-end funds in the sector. The observation provides us with potential "Buy" candidates, based on the Z-score indicator and an attractive discount.

The average Z-score of the high yield CEFs is -0.43 point. Only one week ago the average statistical parameter was -0.65 point. The above funds prove that it is getting difficult to find some interesting statistical reason to review the funds. We have only three closed-end funds whose Z-score is below -1.00 point.

The purpose of this indicator is to show us how many times the discount/premium deviates from its mean for a specific period. In our case, we use the past year as a basis. So, values around -1 and 0 basically mean that participants of that sector are trading around their average discount/premium.

2. Highest Z-Score:

Source: CEFConnect.com

Reversely, if we are looking for potential "Short" candidates, we need to sort the funds by the highest Z-score. As I mentioned, it does not make sense to use the indicator if its value is between 0 and 1 point. In that scenario, we cannot talk about a statistical edge.

А drawback of the leaders of the ranking is the discount which they are traded at, so I will restrain myself from considering any involvement in them.

The Barings Participation Investors (NYSE:MPV) seems like it has almost everything that I am looking for in a potential "Sell" candidate. Its Z-score is equal to 1.20 points and the price is above its net asset value. Just take into consideration its relatively low average daily volume when you analyze it.

Source: CEFConnect.com, Barings Participation Investors

3. Biggest Discount:

Source: CEFConnect.com

If you are seeking new potential "Buys" for your portfolio, probably you may find it reasonable to start from this table. The current market environment has opened up many opportunities in the sector. Yes, the Z-score may go slightly up, but the discounts in the sector remain attractive.

The average discount/premium of the high yield CEFs is -8.49%. Compared to the last week we notice an increase of 0.37%.

I am interested in the leaders of the above tables and especially in Neuberger Berman High Yield Strategies Fund (NYSEMKT:NHS). It has the biggest discount in the sector and one of the lowest Z-scores. I also find as a positive sign the coverage ratio of 115%.

Source: CEFConnect.com, Neuberger Berman High Yield Strategies Fund

4. Highest Premium:

Source: CEFConnect.com

If you want to choose a fund for a hedging reaction of your "Long" positions, I should admit that it will be a difficult task. Currently, we do not have funds traded at a premium which satisfy our requirements. We have already discussed the relatively low average daily volume of The Barings Participation Investors.

Source: CEFConnect.com

5. Highest 5-year Annualized Return On NAV:

Source: CEFConnect.com

Currently, the average return for the past five years is 6.19% for the sector. The interesting candidates for me are the ones which provide us with a satisfying return, an attractive discount, and a statistical edge. The finding of bargains is a difficult task, but trying to incorporate the available fundamental and statistical information is one step ahead.

New America High Income Fund (NYSE:HYB) is the one which caught my attention. Currently, its Z-score is not so appealing, but compared to the average of the sectors it seems satisfying.

Source: CEFConnect.com, New America High Income Fund

6. Lowest 5-year Annualized Return On NAV:

Source: CEFConnect.com

Western Asset High Income Opportunity Fund (NYSE:HIO) is sitting on the first position of the ranking, but it is important to notice that this is a non-leveraged fund with a relatively high daily volume of 334,000 shares.

7. Highest Distribution Rate:

Source: CEFConnect.com

The average yield on price for the sector is 7.90% and the average yield on net asset value is 7.23%. We have already seen that most of the funds are trading at a discount, so this difference should not surprise us.

Source: CEFConnect.com

8. Lowest Distribution Rate:

Source: CEFConnect.com

9. Lowest Effective Leverage:

Source: CEFConnect.com

We have two funds which are not leveraged and four which use a leverage below 10%. The average leverage for this sector is 24.70%.

Source: CEFConnect.com

Statistical Comparison And Potential Trades

The potential "Long" candidate which I am going to review today is Pioneer High Income Trust (NYSE:PHT). Currently, it has an attractive discount of 10.79%. The spread between its price and net asset value is not the only one characteristic which caught my eye.

Source: CEFConnect.com, Pioneer High Income Trust

Its effective leverage is close to the average of the sector. The fund has a positive UNII balance and a positive coverage ratio of 110%. Over the past year, we have not seen a distribution decrease and if the fund keeps its positive performance the distribution cut seems unlikely.

Source: CEFConnect.com, Pioneer High Income Trust

Currently, we do have a yield on the price of 8.50% and a yield on the net asset value of 7.58%.

Source: CEFConnect.com, Pioneer High Income Trust

Source: CEFConnect.com

The fund has an average daily volume of 100,000 shares per day, so you do not need to worry about its liquidity.

Source: CEFdata.com, Pioneer High Income Trust

Most of the investments owned by this CEF are with rating "B." The portfolio is constructed by issuers located globally, but 72% of the assets are located in the United States. A brief overview of the investments shows that the portfolio is mainly comprised of "US High Yield Corp." sector.

Source: CEFConnect.com, Pioneer High Income Trust

Source: CEFConnect.com, Pioneer High Income Trust

Below is the comparison with the iShares iBoxx $ High Yield Corporate Bond ETF and how their prices change over the past 200 days.

Source: Author's software

Source: Author's software


The high-yield sector does not provide us with significant arbitrage opportunities at present. Most of the CEFs are traded at discount and it is difficult to find reasonable "Short" candidates. If we see a break of the support or the resistance of the current trading range, we expect significant changes in the funds' statistical characteristics.

Based on the data that I have reviewed, PHT can be a potential addition to your portfolio.

Note: This article was originally published for our subscribers on 8/19/2018, and some figures and charts may not be entirely up to date.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PHT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.