PIMCO Update May 2022 | Valuations Are Cheap But NAVs Continue To Bleed

Summary

• The PIMCO CEFs issued their May UNII report last week showing significant gains in UNII and distribution coverage ratios.  However, those ratios are artificially high.

• The fund's continue to experience NAV declines mostly because of the high yield market experiencing wider spreads.  If a recession is coming (or here) then spreads should widen out more.

• Valuations are very cheap with PDI and PTY trading in the lowest 10% of historical premiums/discounts going back since inception.

• We are not adding yet as the valuations are cheap as people position away from risk due to the heightened chance of recession.  We would advocate taking a cautious approach.

• I still hold decent positions in PDI and PDO but will not be adding to those positions except distribution reinvestment.  When we think NAVs have stabilized I will add.

Bottom Line At The Top

PIMCO CEFs are seeing their best fundamentals of the last 5 years at the same time valuations are near their lowest.  Does this mean load up?  Maybe.  But my guess here is that these funds are running high leverage and more credit sensitivity than they have in the past. 

Coverage ratios and UNIIs are largely due to a rising dollar and mismatches with hedges on foreign holdings.  Thus, we think the distributions are more vulnerable than they appear.  However, we do not believe that distributions are likely to be cut here unless we experience a larger de-leveraging event.