CEF Report | January 2023 | PIMCO Drops The Guillotine

Summary

• CEF Discounts remain very wide but we think wide for a reason given the tax loss selling that occurred last year and the risk ahead.

• The January Effect is already starting with ALL CEF categories up on the year and the average CEF already up 3.6% in 2023.

• We think investors should focus on the high-quality sectors like Munis, Preferreds, IG Credit, and Government Debt (agency MBS).

• The opportunities in the taxable space remain few and far between since most of that segment is in junkier credits.  There is significant NAV risk there.

• We give our top ideas given our narrative.

The closed-end fund space has been a weak one in 2022 with tax loss harvesting berating them again towards the end of the year.  The question is, will 2023 be a rebound year?

In our Monthly Note, we have stated that the January Effect is real and that we are likely already seeing the initial phase of that.  There is no doubt that NAVs in 2022 were under pressure from rising rates - but remember that all the NAV weakness in 2022 was rate risk, and NOT recession risk.

The chance for a recession is very high and we think the Fed is heck-bent on triggering one.  If that is the case, look for credit spreads to widen out from here and cause further decay in NAVs on the bond CEF side of things- namely in taxables like floating rate loans, high yield bonds, CLOs, and multisector.

CEF have rallied since the start of the year erasing the weakness (already) seen since Thanksgiving.