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CEF Market Update: V-Shape Discount Recovery Leaves Fewer Bargains

Mar. 08, 2020 5:22 AM ETANGL, BBHY


  • CEF discounts have staged an impressive recovery despite continued weakness in markets, supported by attractive yield differentials to Treasuries.
  • We take a look at the corporate credit sector and view high-yield as more appealing to loans as we expect sharply lower rates to pressure loan payouts more.
  • As discounts remain tight overall, high-yield open-end funds deserve a look where we like ANGL and JPHY.
  • This idea was discussed in more depth with members of my private investing community, Systematic Income. Get started today »

Despite good jobs numbers and central bank action, broader risk markets remain nervous about an extended supply shock that may hit the global economy. CEF discounts, however, remain surprisingly sanguine and not at all reflective of sharply lower stocks, wider credit spreads and higher volatility readings.

Although we find overall CEF discounts disappointingly tight, sharply lower interest rates suggest that this could very well be the new normal. That said, at these levels, we think open-end funds deserve a look. In the high-yield sector, which we touch upon in this article, we like the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) and the JPMorgan Disciplined High Yield ETF (JPHY).

Teflon CEF Discounts

Breaking down total price returns since the start of the sell-off across CEF sectors, we can see that most sector discounts have widened just a few percentage points with some even tightening in the period. This is in contrast to much sharper drops in NAVs.

Source: ADS Analytics LLC, Tiingo

If we look at the discount time-series since the drawdown began, we can see two distinct periods - widening during the first week, followed by gradual but steady tightening. All in all, the average sector discount is only about 1% wider since the sell-off began, hardly bargain territory. And this is despite a reversal in equity performance.

Source: ADS Analytics LLC, Tiingo

So, despite multi-year highs in volatility and credit spreads, current CEF discounts are around middle-of-the-pack values over the last six years.

Source: Systematic Income Investor CEF Tool

To see whether this is unusual, let's check how discounts performed during the December 2018 episode. Interestingly that episode looks a lot similar to our current one.

Source: ADS Analytics LLC, Tiingo

We would highlight three similarities:

  1. Discounts stopped widening well before the end of the equity

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This article was written by

ADS Analytics profile picture
Income investing across BDCs, CEFs, ETFs, preferreds, baby bonds and more.

At Systematic Income our aim is to build robust Income Portfolios with mid-to-high single digit yields and provide investors with unique Interactive Tools to cut through the wealth of different investment options across BDCs, CEFs, ETFs, mutual funds, preferred stocks and more. Join us on our Marketplace service Systematic Income.

Our background is in research and trading at several bulge-bracket global investment banks along with technical savvy which helps to round out our service. 

Analyst’s Disclosure: I am/we are long ANGL, JPHY. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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