These Debt CEFs Have Performed During This Rate Sell-Off
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.
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