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These Debt CEFs Have Performed During This Rate Sell-Off

Jan. 13, 2021 11:27 PM ETNCV, NMCO
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Value, CEFs

Seeking Alpha Analyst Since 2014

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  • Welcome to another blog post from Systematic Income.
  • Between the start of year and 12-Jan 10-year Treasury yields have risen 0.23%.
  • We take a look at which debt funds have fared well over this period.
  • Take a 2-week free trial of Systematic Income to explore our Income Portfolios and our CEF Tool.
  • We have maxed out our discount to the service to 20% until the start of the weekend.

A macro recovery, growing trade tensions, pent-up consumer spending, a supply shock and a less-inflation-sensitive Fed are all factors pushing up rates. Over the first 8 trading days of the year 10-year Treasury yields have risen by 0.23% before giving some back on Wednesday.

Our stance on the service has been to tilt to funds and sectors that are either floating-rate such as loans and non-agency RMBS, are higher-yielding as they have more room for their credit spreads to tighten and offset a rise in rates and funds with a link to equity upside in a reflationary environment such as funds with a partial allocation to convertibles.

So far so good! The chart below shows the NAV return of the top-performing debt CEFs in 2021 until 12-January - a period when 10-year Treasury yields rose 0.23%. 

Two of the top 3 funds are our current holdings. NCV has a partial allocation to convertibles which has worked out very well - unlike fully convertible bond funds NCV actually generates attractive income yields (fully convertible bond funds typically have distribution coverage of only 30-50%), does not have their extreme volatility and participates in equity upside which tends to perform during reflationary episodes such as the one we are experiencing now.

NMCO is a high-yield focused tax-exempt fund which has benefited from credit spread compression. We continue to hold the fund both in our High Income Portfolio and our Muni Income Portfolio. 

A few other funds such as NID that has an attractive term feature, EFR and FIV are a few of our other holdings. We expect these funds to continue to outperform in an environment of rising interest rates. 

Thanks for reading.

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Analyst's Disclosure: I am/we are long NMCO, NCV.

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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