Seeking Alpha

Weekly Review: High-Yield CEFs - Currently, DHF Is Traded At -5.00 Z-Score

by: Arbitrage Trader
Arbitrage Trader
Arbitrage, debt, bonds, short-term horizon

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

Оne of the worst weeks for the sector for the year. Over the past week, we saw a sharp decline in the price of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). The price of the benchmark fell by $2.93 and finished at $80.23. We have not seen so low levels since February 2016.

Source: Barchart, iBoxx $ High Yield Corp Bond iShares

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 an increase of 0.72 bps. As we can see, the current levels are significantly lower compared to the ones of the financial crisis.

ChartUS High Yield Master II Option-Adjusted Spread data by YCharts

Source: YCharts, US High Yield Master II Option-Adjusted Spread

Below, you can find a statistical comparison between the iShares iBoxx $ High Yield Corporate Bond ETF and the iShares 20+ Year Treasury Bond ETF (TLT). As discussed, we observe a low correlation between the two sectors. It is only 0.10 point for the last 200-day period:

Source: Author's software

On the other hand, we have a statistical comparison between the iShares iBoxx $ High Yield Corporate Bond ETF and SPDR S&P 500 ETF (SPY). Definitely, a strong relationship between them.

Source: Author's software

The News

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

Over the past week, several funds from the sector announced their dividends:

  • The shareholders of New America High Income Fund (HYB) will be paid a special dividend of $0.0830 per share on January 31, 2019. The Fund will pay a regular monthly dividend of $0.0550 per share on February 28, 2019.
  • Pioneer High Income Trust (PHT) $0.0650 per share.
  • Pioneer Diversified High Income Trust (HNW) $0.0950 per share.
  • Eaton Vance High Income 2021 Target Term Trust (EHT) $0.0410 per share.
  • MFS Intermediate High Income Fund (CIF) $ 0.0197 per share.
  • First Trust High Income Long/Short Fund (FSD) $0.1050 per share.
  • AllianceBernstein Global High Income Fund (AWF) $0.0699 per share.

Review Of High-Yield CEFs

Weekly % Changes In The Sector


1. Lowest Z-Score:


The above sample represents the most statistically undervalued closed-end funds in the sector. The Z-score indicator shows us how many times the discount/premium deviates from its mean for a specific period. It is not a surprise to find most of the funds traded at significant low Z-scores and discounts. Of course, all could be explained by the new lowest levels reached by the benchmark of the sector and the recent panic in the stock market which sparked some fears in the investors regarding the credit situation of the companies.

The sharp decline of the prices affected the statistical parameter of the funds and currently, we find funds traded below Z-score of -5.00 points. No doubt, from a statistical point of view, this is an incredible edge, and all of these CEFs may be reviewed as potential "Buy" candidates.

Once again, Apollo Tactical Income Fund, Inc (AIF) is the fund with the lowest Z-score. Last week, its Z-score was -4.10 points, but now, it is -5.90 points. Over the past week, the price of the fund fell by 7.76%, and its net asset value fell by 3.12%.


2. Highest Z-Score:


We are not surprised to see that the funds do not provide us with a statistical reason to short them. Nevertheless, the current market situation requires to be prepared with eventual hedging reactions of all of our long positions. The above representatives may play such a role in our portfolio.

The average Z-score of the high yield CEFs is -3.43 points. A week ago, the average Z-score was -1.89 point. On a weekly basis, we do observe a significant change in the average value.


3. Biggest Discount:


The recent sell-off has opened up many opportunities in the sector, and we find at least a statistical reason to review them. The average spread between the price and the net asset value for the high yield sector is -15.27%. The number only signals that we may find many undervalued closed-end funds. Of course, it is not a bad idea to combine the discount with a low Z-score. The above sample is a good starting point for your research for potential "Buy" candidates.


4. Highest Premium:


Currently, we do not have funds traded at a premium, which satisfy our requirements. The Barings Participation Investors (MPV) looks like the only possible choice, but be aware of its relatively low average daily volume which bears a risk.

Here is the full picture of the funds from the sector. Below, we have depicted their discount/premium and their Z-score:


5. Highest 5-year Annualized Return On NAV:


The average return for the past five years is 4.19% for the sector. As you can see, the current yields of most of the funds are much higher than the historical ones. This fact can be easily explained by the sharp declines in their prices over the past year.

The funds which caught my attention this week are the ones with the lowest Z-scores. As an active trader, I pay serious attention to the statistical edge of the funds and try to find a place where the market overreacted during the period of a sell-off. Therefore, my research starts with the most statistically undervalued funds or the ones with the biggest discounts. In our case, we do have AIF, HYB, CIK, EAD, KIO, DHY and AWF which could be reviewed.

6. Highest Distribution Rate:


Above, we saw what was the historical performance of the funds, but probably most of you are interested in the current return which could be achieved, and that is the reason why I sorted the funds by the highest distribution rate. We have eight funds from the sector which offer a yield above 10% and four which offer a yield above 11%.

The average yield on price for the sector is 9.32% and the average yield on net asset value is 7.85%. The difference between the two values can be easily explained by the spread between the price and the net asset values of the funds.


7. Lowest Effective Leverage:


We have two funds which are not leveraged and three which use leverage below 10%. The average leverage for the sector is 26.44%. Below, you can see the relationship between the effective leverage of the funds and their yield on net asset value.


Statistical Comparison And Potential Trades

The fund which I am going to review today is Dreyfus High Yield Strategies Fund (DHF). It is one of the funds which offer a Z-score of -5.00 points, and I just could not miss the opportunity to review it. The statistical edge is accompanied by an attractive discount of 16.01%.


Over the past week, the price of the fund fell by 9.82%, while its net asset value fell by 4.08%.


ChartDHF data by YCharts

We do have a yield on the price of 10.97% and yield on the net asset value of 9.22%. Both of them are above the average for the sector.

The current distribution is $0.0235, and it is paid on a monthly basis. The average daily volume of 178,000 shares meets my requirements, so there is nothing to worry about here.


Most of the investments owned by this CEF are with a rating "B". Their weight is 55.23% of the portfolio. The assets labeled as "BB" rating are 21.54%. For me, it is a good sign that only 1.49% of the assets are "Not rated".

Source: Fund Sponsor Website

The portfolio seems well diversified between different sectors. However, a brief overview of the investments shows that "Energy" and "Telecommunication Services" sectors have the biggest weights.

Source: Fund Sponsor Website

Below, you can find the statistical comparison between iShares iBoxx $ High Yield Corporate Bond ETF and Dreyfus High Yield Strategies Fund. The price correlation of 0.70 points for the last 200 days is relatively strong and as you see the prices are traded at four standard deviations. In case you need a hedging reaction, you can use directly the benchmark of the sector or choose some of the funds with relatively high Z-scores.

Source: Author's software

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 discounts, and it is difficult to find reasonable "Short" candidates. On the other hand, many of the funds provide us with a statistical edge to review them as potential "Buy" candidates.

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

Note: This article was originally published on Dec. 23, 2018, and as such, some figures and charts might not be entirely up to date.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DHF 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.