CEF Report September 2022 | Discounts Finally Moving Out

Summary

• We have been waiting for discounts in closed-end bond funds to widen out significantly and they finally occurred in the last week of September.

• Discounts are now in the bottom quartile and in some sectors, bottom decile of observations going back to 1996.

• That said, while discounts point to a solid buying environment, NAVs and macro risks remain.  High yield spreads remain too tight for our liking.

• We keep our underweight rating on bond CEFs at the moment and thin we will have a better entry point in the next few months as HY spreads widen out to incorporate a recession.

• There are some good deals out there at the moment and think you can make rotational and tax-loss swaps to capitalize on the discounts.

We are finally seeing the breakdown of the closed-end fund marketplace.  In this report, we dig into the drivers of the declines as well as upcoming opportunities as we expect a decent tax-loss harvesting season.  As the Fed tightens us into recession, we will need to be patient in adding CEFs to our portfolio as NAVs will continue to fall and distributions are likely to continue to be cut.

Remain disciplined and monitor the sleeve carefully.  We remain tactically underweight but active with rotational trades occurring more frequently to take advantage of opportunities as they present themselves.  Within the portfolio, we stay in high quality and loans almost exclusively.

Discounts Are Widening Out.....  Finally!