CEF Report June 2022 | Valuations Tighten But NAVs Yet To Stabilize

Summary

• Closed-end funds continue to move lower with the market exacerbated by their leverage.

• Taxable CEFs are now trading in the bottom decile of discounts over the last 25 years.  On discounts, they represent real value but we buy the NAV, not the discount.

• Muni CEFs remain a better option though I would be EXTREMELY cautious entering in to them unless you have a long-term time horizon and need the income.

• Credit spreads look like the next market to break so we would want to be underweight high yield and loans.  Our target would be a 6.0% spread but really 8.0% would be preferred.

• We give a few options that we think are decent and safer areas to buy in at the moment for those willing to stick their necks out.

Closed-end funds ("CEFs') remain in a downtrend market but eventually, the buying opportunities will be abundant.  The question is "when?"

We are watching several factors but we want to highlight the essence of the closed-end bond fund buy-and-rent strategy.  This is a strategy not based on short-term trends but actions based on where we are in the cycle. 

In other words, if we are late cycle, credit spreads are really tight, yields low but the curve steepening, and in CEFs, discounts relatively narrow, we would want to be net sellers of those positions.