A Look Under The Hood Of PCI & PDI

PIMCO Dynamic Credit and Mortgage (PCI) and PIMCO Dynamic Income (PDI) still remain at the center of our Core Portfolio- as they have for the last 3.5 years.  The "PIMCO twins" have done extremely well on a risk-adjusted basis but there are changes afoot and we thought we'd go through some of them with our members.  

The main thesis has been relatively unchanged for most of these last three years- that these vehicles housed boatloads of non-agency mortgage backed securities purchased at just the right time.  One of the things closed-end fund ("CEF") investors often fail to recognize is the initial date of new fund launches.  These can be well-timed by fund sponsors providing a competitive advantage against the rest of the sector and create a great opportunity for investors.

That thesis may be shifting- not radically- but slowly over time.  In the last year, they've been moving away from that bread and butter investment.  While it still represents the largest sector in the portfolio, the size of it is declining in terms of market value. 

We will run through why this is and what it potentially means for investors.

Despite a -2.2% decline in non-agency debt in the fourth quarter, the sub-sector finished 2018 with a +3.3% gain surpassing the broader credit markets.  New issuance continues to trend higher yoy but did fall off in the fourth quarter.  The new issuance market has been largely dormant since the Financial Crisis but has, in the last couple of years, shown signs of life. 

In the table below, you can see private label mortgages (the ingredients for non-agency MBS) constituted over one-third of the entire market in 2007.  Shortly thereafter, the space was largely gone until last year when it doubled from 4% to 8%.  

(Source:  Ginnie Mae)

The decline in the fourth quarter for non-agency MBS stems from the widening spreads realized across most credit sectors.  Recall in our previous writings that the market lumps non-agency MBS in with high yield bonds, something we highly disagree with at this point in the cycle.  Our rationale is that ten years following the Financial Crisis where subprime mortgages cratered, these borrowers continue to make their payment.  

These formerly busted MBS' that are now "re-performing loans" meaning that either the borrower started making payments again or the loan was restructured so that they could afford the payments, continue to be a main driver of PIMCOs strategy since 2010.  However, in the last several months, the percentage of the portfolio devoted to non-agency continues to fall.  

In the last quarterly update (December 31), PCI had just over 50% in non-agency debt.  That is down significantly from early last year when the fund held over 70% in the sector.  Instead, high yield and non-USD EM credit is now approximately one-third of the portfolio.  The fund has also reduced their interest rate swap exposure increasing the duration of the fund.  This not entirely surprising given PIMCOs notion that the 10-year bonds have hit their highest yields of the cycle.  They do still have several hedges on the short-end of the curve and are long "the belly".  

PCI and PDI are not outperforming the multisector space like they normally do.  The main drivers of that are the lack of a significant rally in non-agency MBS compared to other sectors of the market and the relative differences of funds in that sector.  For instance, PGP, despite the significant drop it has taken recently, continues to be the top performer mainly because it is really an equity index.  Franklin Universal Trust (FT) is a fund that has over one-third of the portfolio in stocks.  So you do have to be careful comparing funds in this particular sector. 


The total return on PRICE has been a far different story and speaks volumes on the need to be ready to pounce on great opportunities.  We pounded the table in December about the deal of the year being offered up by the markets in these names, particularly PCI.  A confluence of factors came together to create this opportunity.  Those included:

  • Tax loss harvesting

  • Special distribution capture selling

  • A large drop in the NAV due to distribution payments

  • Massive negative sentiment in the CEF space

  • Fast widening credit spreads

In the chart below, you can see the darker line completely collapse in mid-to-late December because of those factors.  Of course the NAV was also down (partially) due to those same factors listed above.  In our Flexible Portfolio, we essentially used up all cash to go massively overweight the position.  


And thus, the YTD price returns are up low-to-mid teens easily besting the S&P 500.  That is fantastic performance for a bond fund.  Since then, we have taken off the overweight and moved back to our target weight in the Core Portfolio.  


With PCI at a +2.7% premium and PDI at a +15.3% premium, the funds are very close to fully valued.  We have not added to either of the funds in the last three months and continue to hold at levels slightly above their target weights.  We are happy to continue to collect the 8.5% income stream and wait for the next market hiccup to re-add the overweight position.  

Many investors think the shares are overvalued but we would disagree.  One of the reasons would be that they are still a couple of points off the 52-week highs in terms of premium.  In addition, z-scores are positive but no where near the +2 levels that would initiate a cause for caution.  Lastly, the new Federal Reserve's dovish tilts means that interest rates will remain lower, leverage costs are no longer the severe factor they were, and CEF structures earnings 8%-9% are now more attractive warranting a higher valuation.


One of the most common questions we receive from members is whether we think PCI or PDI will cut their distributions in the near-term.  Right now, we see nothing that would cause us concern about the sustainability of the payment.  PCI and PDIs distribution payment have been the same since October 2015.  In the interim, they have paid significant cash payments in the form of year-end special distributions.

Coverage levels for both funds fell off in the last few months, albeit from very high levels.  PCI was at 192% in December but it declined to 89.2% in February.  PDI was at 85% in December and is now sitting at 76% as of February.  We will be getting March figures in about two weeks time which should shed some significant light on trends. 

UNII levels are still nicely positive with PCI at +22 cents and PDI at 10 cents.  PHK, PGP, and RCS, all of which cut their distributions on April 1st, all have negative UNII values of -12 cents, -12 cents, and -21 cents*.  In addition, and this is the key, all three of these funds have issued 19a notices for most of the last two years.  If PCI and PDI were likely to cut, we would likely have to see many months of 19a notices come out.  We think the distributions are safe for several more months at the least.  

Concluding Thoughts

The reduction in the level of non-agency MBS is not a large concern for us.  PIMCO is known for putting the best ideas into these vehicles that they can find because they get the most bang for their buck.  Sticking a small position into PIMCO Income, their large open-end mutual fund, won't have any effect simply because of its massive size.  

One thing to consider is that most banks and hedge funds have been unloading these securities as they've closed the gap to par.   With the selloff in high yield securities and only the small decline in non-agency MBS debt during the same period, perhaps they took some of that position off to re-allocate towards high yield.  

In any event, with these funds there's a lot of trust in PIMCO management.  You're largely investing in a black box.  Well maybe not completely black but definitely obscured.  When you do that, you just have to study the NAV, assess the valuation, and compare to what else is in the market today.  

Most bond CEFs have recovered mightily since the start of the year so there aren't many other cheap options where you can earn 7.5%-plus yields with some upside optionality to boot.  For now, we are holding on to our position and collecting the income stream- though as we noted earlier, we did take off the significant overweight we had on PCI.  

Another market hiccup will surely come.  Until then, we have some dry powder sitting in open-end funds and even some cash that is on the sidelines ready to be deployed.  One of the hardest things an investor can do is buy when the market and these funds are selling off strongly.  Our marketplace service helps guide (hand hold) members who do get scared and don't know what to do during those times.  


Weekly Commentary | March 31, 2019

Not too much happened this week and markets were nicely positive reversing prior week's losses.  Stocks had their best quarter in a decade with industrials leading the way in the S&P 500.  Utilities were the worst performing sector with telecom the next worst.  Google, which is a large portion of the sector, was fairly weak on regulatory pressures.  

First quarter earnings will start in a couple of weeks and thus, investors were largely in a holding pattern as volumes were extremely low.  Volatility, which jumped earlier in the week, moderated as we progressed through it.  The largest IPO of the year helped stocks when Lyft began trading.  

Global growth continues to look sluggish with data in housing starts declining by 9% in February.  Pending home sales also had a weak month dropping yoy.  The news counters the bump in refinancing activity with the lowest mortgage rates in a year.

Muni demand continues to be strong as new supply was well received by the market.  As tax bills come due, demand for and interest in munis is likely to only increase.

The yield curve remains inverted between the 10-yr and the 3-month t-bill (by about 3 bps, 2.41% to 2.43% and just above the Fed Funds target rate of 2.40%).  Historically, the inversion has preceded a recession by 12 to 24 months.  However, between the inversion and the actual start of the recession, risk assets tend to rally (in some cases dramatically).  

Dallas Fed president Robert Kaplan suggested that an inversion would need to be deeper and last for months to be a significant worry.  Some suggest that it takes several quarters for rate hikes to filter through the economy (libor-based borrowing tends to take a quarter or more to reset).  There could be multiple hikes still working through the economy.  

JPM Commentary:

How worried should investors be about earnings? The CQ1 preannouncement season has been busier than normal and a number of high-profile companies have cut guidance this week, including ADM, ALB, BECN, DWDP, Infineon, LUV, Osram Licht, and Samsung Electronics (ALB and DWDP were out overnight). Many of these companies are citing temporary/exogenous headwinds that ostensibly should abate in CQ2 and beyond (ADM, ALB, and DWDP all suggested this and Infineon said CQ1 would mark the trough of the semi cycle). Investors may come to see a silver lining in the growing pile of warnings as they will knock CQ1 expectations low, creating a low bar for companies to “surprise” once the reporting period actually gets underway. Meanwhile, there have been some encouraging earnings developments this week as a bunch of Feb-end firms (like ACN, LULU, PVH, and others) put up solid prints and the two builders (KBH and LEN) both made sanguine remarks on domestic housing trends (although the Feb-end season has been far from perfect – RH slashed its guidance overnight and recall FDX underwhelmed too). In the near-term, all the recent earnings updates are probably a positive as expectations are very subdued at the moment – TSYs have surged and people are overly nervous about the state of growth. The CQ1:19 SPX EPS estimate has declined from ~$42 back in Jan to ~$38.80 at this point but CQ1 did contain a number of one-time headwinds that won’t repeat going forward (the gov’t shutdown, extreme weather conditions, etc.).

For those that keep saying that "this time is different" when it comes to the yield curve inversion, do not believe them.  I can recall the same things being said in 2006-2007.  The most common refrain back then was that China was buying up loads of our debt depressing the long-end of the curve.  

The key for the next three months will be first quarter earnings and guidance for the next quarter/ rest of the year.  Expectations have been reduced significantly since early December so if results come in further below those already reduced levels, expect a weaker market.  But the greater probability is that the economy was decelerating back to the prior level of growth.  We do not think it will decelerate further than that and growth will be in the 2% range again.  

As such, expectations look to be a little low for the year.  In addition, a second re-acceleration is also possible given the lower rate environment.  The risk is to the upside as we move through the second quarter.  

Closed-End Fund Analysis

Distribution Increase

Voya Prime Rate Trust (PPR):  Monthly distribution increased by 7.8% to $0.0275 from $0.0255.  

Distribution Decrease



EV Muni Bond II (EIV) completed the merger into EV Muni Bond (EIM) on March 22, 2019.  The exchange ratio was 0.982064.  

Initial Public Offering

Tortoise Essential Assets Income (TEAF):  Tortoise launched a new fund, raising $296M in assets with the overallotment.  The fund will trade on the NYSE with the following investment strategy:

  • The fund is intended to provide investors with exposure to essential assets sectors across all levels of an issuer’s capital structure, including access to direct investments that may not otherwise be widely available to many investors. The fund will emphasize income-generating investments in social infrastructure, sustainable infrastructure and energy infrastructure. It will provide investors with access to the skill and experience of the Tortoise platform with deep expertise in essential assets and income investing.

Tender Offer

EV Muni Bond (EIM):  The fund announced a cash tender offer for up to 10% of its outstanding shares at a price of 98% of NAV.  The tender begins on April 18th and expires May 17th of this year, unless extended.  

  • The Board also authorized the Fund to conduct two conditional cash tender offers to follow the Firm Tender Offer, provided certain conditions are met. Specifically, as soon as reasonably practicable after the Firm Tender Offer closes, the Fund will announce via press release the commencement of a 120-day period. If, during such period, the Fund's common shares trade at an average discount to NAV of more than 6%, the Fund will conduct an additional tender offer beginning within 30 days of the end of the month in which the First Trigger Event occurs.

  • The Initial Conditional Tender Offer will be for up to 5% of the Fund's then-outstanding common shares at 98% of NAV per share as of the close of regular trading on the NYSE on the date the tender offer expires. If the Initial Conditional Tender Offer occurs, the Fund will announce via press release the commencement of a second 120-day period. If, during such period, the Fund's common shares trade at an average discount to NAV of more than 6%, the Fund will conduct an additional tender offer beginning within 30 days of the end of the month in which the Second Trigger Event occurs.

  • The Second Conditional Tender Offer will be for up to 5% of the Fund's then-outstanding common shares at 98% of NAV per share as of the close of regular trading on the NYSE on the date the tender offer expires. The Second Conditional Tender Offer will not commence and the Fund will not announce a second 120-day period unless the Initial Conditional Tender Offer occurs.


CEFs continue to see discounts tighten across the board.  Some valuations look excessive but areas of the taxable bond market remain a bit cheaper than the rest.  

Some funds that look expensive include:

(I don't trust that 1-year z-score for CET as cefdata.com has +0.7)

Here are what some national muni CEFs have done, sorted by YTD:

BTA is now up 15.7% YTD and nearly 14% in the last year.  The discount has tightened and is now less than 1.5% away from par.  The yield is just under 5% so from that perspective it is still relatively attractive but as we wrote in the muni update for this month, we think there are better choices.  If you still hold, think about swapping to BKN or MQT.  

For those that own Reavers Utility Income (UTG) they issued a 19a for March with 36.9% being long-term capital gain and 63.1% net investment income.   Fiscal year to date, 47.7% has been net investment income and 51.9% being long-term capital gain.  Utilities continue to look attractive as money flows into defensive stocks.  While rates look like they've bottomed- at least in the near-term but likely for the interim- investors still appear to be on edge about putting capital to work in high beta stocks.  

Some Nuveen funds also issued 19a notices.  Primarily their covered call / buy-write strategies. 

Lastly, we saw some significant preferred stock rebalancing last week with dozens of issues seeing over 3x their average daily volume.  There were seven issues that saw more than 10x their average daily volume.  

  1. AllianzGI Convertible and Income (NCV-A):  34x volume

  2. AllianzGI Convertible and Income II (NCZ-A):  25x volume

  3. Gabelli Conv and Income (GCV-B):  15x volume

  4. UMH Properties (UMH-C):  11.5x volume

  5. Rexford Industrial Realty (REXR-B):  11x volume

  6. First Bancorp (OTCPK:FBPRP):  11x volume

  7. Southern CA Gas (OTCQB:SOCGM):  10x volume

  8. Cedar Realty Trust (CDR_B):  9.5x volume

  9. Public Storage (PSA-W):  8.6x volume

We will have some ideas for those looking for individual preferred ideas in our update coming out next week.


Here is CEF sub-sector info for the last week. Please be advised that these are CEFConnect's sectors and don't always reflect the actual investment exposures in the fund.

Here we look at our universe of Core funds- primarily in the taxable and municipal sectors.

Lastly, we do a top 10 expanded to ALL CEFs.



YH Convergence Trade Report | April 2019

YH Convergence Trade Report - April 2019

A convergence trade is a closed-end fund that is trading at a wider-than-usual discount and is likely to close that discount. On some occasions, the discount is warranted- most likely because they cut the distribution. Other times they are trading wide because of the sector being out of favor or general market weakness.

We look at our table to see those funds that are trading well below their 52-week average. We further inspect how far off the fund is from its 52-week high. Given the favorable Fed backdrop - basically a green light for CEFs- in general we think it is highly possible that they re-reach those 52-week highs in premiums.

Please note, this is not a blanket buy recommendation of these funds but a starting point for further analysis.

There is a lot of data below- do not be intimidated! The keys here are the two grey columns on the right side of the table.

The "convergence opp" column (third from the right) shows the amount of potential discount closing if the fund were to get back to their 1-year discount (recall that we said we thought discounts could exceed their 1-year levels and approach 52-week highs). The second to last column (green labeled "52W Disc High %") on the right shows the 52-week high in discount/premium. The last column (52 wk High Opp) shows the amount of discount tightening that would be needed in order for it to reach those 52-week highs again.

Remember, sometimes discounts exist for a reason - most likely because the distribution has been cut. I'd love to start a discussion and get a conversation going on some of these opportunities. Please leave comments below or join us on the chat during the market hours.

It is interesting to see the differences month-to-month in the chart. The list continues to shrink as the discounts tighten up.

For those that are looking for a quick and reduced universe of funds to investigate, check out these funds. Watch for those that have recently reduced their distribution.

Again, if you think you've found a gem in the rough, comment below or send me a quick personal message and we dig deeper.


Weekly Commentary | March 24, 2019

Stocks suffered their largest one-day loss of the year as global growth fears accelerated after manufacturing data was released on Friday.  We had two main events this week:  the FOMC meeting on Wednesday and the preliminary (also called "flash") PMIs Friday morning.  In addition, to those we had some bad earnings releases from Nike, Fedex, and Micron helping drive down the narrative.

On the week, the S&P 500 fell just over 1% while small caps fared the worst losing over 3%.  Bond indices did well thanks to those falling rates.  The Agg was up 0.87%, while high yield was up 26 bps.  Munis did well rising 67 bps. REITs and utilities did the best on the week.  

The 10-yr ended the week at 2.44%, the lowest level this year and down significantly from last Friday's 2.58%.  Oil did not move much on the week ending around $59 a barrel.  But the VIX spiked on Friday to 16.8 from a 12-handle on Wednesday.

The Fed meeting on Wednesday had Chairman Jay Powell dialing back the rate hike outlook to zero for 2019.  This was down from two hikes expected in the December release.  The committee now sees only one hike over the next three years while the market is now pricing in a small cut next year.  More below on the Fed's dovish stance.

Europe continues to look sickly.  The German manufacturing sector ("PMI") sparked the sell-off as their initial reading hit a 6-year low of 44.7 (anything below 50 is a contraction).  The Eurozone as a whole is still above 50 at 51.3, but that reading was below forecast.  

Lastly, we had some terrible earnings releases from Fedex, Nike, and Micron which exacerbated the negative sentiment.  Fedex, an economic bellwether, fell far short of expectations and cut guidance (again).  Micron also issued light guidance but the shares rose on the news.  Nike's report was not bad but spoke to some larger global weakness.  

In reaction to the news, global bond yields plummeted with the 10-yr German bund reaching negative territory for the first time in nearly 3 years.  The terms "recession" and "yield curve" saw some of the largest searched trends on Google on Friday as a recession indicator was triggered.   

The 10s-3m curve (10yr yield minus the 3-month t-bill yield) went negative on Friday thanks to global growth concerns and falling yields globally.  This likely exacerbated the decline in the markets.  When it inverts, investors believe there is a recession coming relatively soon.  The last time the curve inverted was in 2007, near the peak of the market prior to the global financial crisis.

Typically, a recession comes 12-18 months following an inversion.  What is important and often failed to be mentioned in the media is that the curve needs to stay inverted for a full quarter- not just hit for a day or few days.  So technically, we are not there yet.  We will keep watching.  

As of yet, there were no signs of panic in the credit market.  This is a good thing as it could be more algo/sentiment driven market movement in the equity indices.  

As we've been saying, this is late cycle but it is unlikely that the bull market ended on Friday.  We were just a few points from all-time highs going into last week.  It is likely we make another run for them soon.  The key factor is not what is happening here (in the U.S.) but in China and Europe.  Chinese growth is an important domino that could either propel us to new highs or drag down US (and European) growth further.  

Closed-End Fund Analysis

Distribution Increase

FT Sr Floating Rate (FCT):  Monthly distribution increased 4.2% to $0.0625 from $0.06.

Distribution Decrease


Special Distribution

Insight Select Income (INSI):  Distribution amount of $0.14.  Ex-div date of 04.04.19 and payable on 05.08.19

Name and Investment Policy Change

Highland Floating Rate Opp (HFRO) is changing its name to Highland Income Fund (HFRO).  The cusip and ticker will remain the same.  The policy change simply removes the old requirement of having 80% of net assets invested in floating rate loans.  

  • The Fund will pursue its investment objective by investing primarily in the following categories of securities and instruments:

  • (I) floating-rate loans and other securities deemed to be floating-rate investments;

    1. (II) investments in securities or other instruments directly or indirectly secured by real estate (including real estate investment trusts ("REITs"), preferred equity, securities convertible into equity securities and mezzanine debt); and

    2. (III) other instruments, including but not limited to secured and unsecured fixed-rate loans and corporate bonds, distressed securities, mezzanine securities, structured products (including but not limited to mortgage-backed securities, collateralized loan obligations and asset-backed securities), convertible and preferred securities, equities (public and private), and futures and options.

  • Once effective, the Fund will no longer be required to invest at least 80% of its assets in floating-rate loans and other securities deemed to be floating-rate investments. Highland Capital Management Fund Advisors, L.P., the Fund's investment adviser (the "Adviser"), believes the change will expand the Fund's universe of opportunistic investments and provide additional flexibility when investing outside of floating-rate instruments.

  • Until the effective date, the Fund will continue to invest in accordance with the 80% Policy. Once the changes take place, the Adviser still expects to invest a significant portion of the Fund's portfolio in floating-rate securities.


The Fed announced that they are essentially done in this cycle- for the time being- both in raising rates and in reducing the balance sheet.  The Fed Funds curve is now flat and even assumes a very slight cut through 2020.  That means it's better for the market that the Fed will not act for the next two years.  

Any CEF investor must incorporate the current and anticipated interest rate environment when assessing where to allocate capital.  One thing we looked at this week is the possibility of raising 'sell threshold' figures on the Google Sheet to incorporate the new benign rate environment.  It is clear that the previously established thresholds were built under a different paradigm.  

Other things we will be looking at is the allocation to floating rate.  While it has helped us the last few months given how oversold it was in December/January, I do think it is time to consider reducing that allocation.  If you want to maintain exposure to securities with a lower duration, then look at hedged fixed income strategies and high yield alternatives instead.  Some that come to mind at PPT, ISD, and PIMCO twins. 

Muni CEFs and non-agencies in the mortgage sector continue to be the best positioned in this current environment given the falling rates and inverted curve.  Munis especially are attractive and continue to provide a natural hedge to the market moves.  While we do not see a substantial leg lower in the near-term, the inverted curve and the slowing global economy does increase the likelihood.  

Below are some one-day changes in NAVs for different funds.  You can see why we focus on the MBS funds.  While PCI and PDI saw NAVs decline a bit, largely because of the exposure to high yield, the heavier MBS open-end mutual funds were either flat or up on the day.

The last two securities on the list (HYG and MBB) show the differing performance of the sectors on Friday.  High yield, which has been performing well, lost 36 bps on the day while MBB, a mortgage focused ETF, was up 33 bps.  That helps drive the NAVs of the open end funds like PTIAX (+31 bps), IOFIX (+8 bps), and CLMFX (+40 bps).  

This continues to be an area we like.  Unfortunately in the CEF space, there aren't many cheaper options so we've been using open-end funds.  Watch JMT/JLS for a better opportunity to get in.  Remember, these funds are merging and becoming perpetual trusts with a 100% tender offer.  Any discount greater than 1% is a buy for me.


PIMCO released their monthly UNII and earnings report on Thursday after the close.  The big news from it was the revision to the four prior months for both PCI and PDI.  This was not a huge deal as it looks like PIMCO essentially, starting in October, reversed the data points for (PCI) and (PDI).  In other words, the PDI data was placed in the PCI field starting in October and vice versa.  The table below lays it all out.  

The $1.06 net investment income number for PCI prior to the revision was the PDI number for October.  PCI's NII should have been $0.87.  The same mistake was made for both coverage ratio and UNII.  This appears to be more of a data entry error rather than an accounting error.  

PIMCO muni CEFs continue to shed valuable UNII.  PCQ (CA Muni) lost another two cents of UNII in February for the second straight month.  At this rate, it will exhaust its UNII balance in 18 months.  PML, the other high UNII fund, lost 1 cent.  PNF and PYN, both NY muni CEFs, each lost a penny too.  Average UNII across all funds fell by one cent to 8 cents.  

Overall, coverages were down a bit with the average muni CEF ratio at 91.1% compared to 93.2% in January.  Still, the 3-month stacks (February 3-month coverage ratio versus November's 3-month coverage ratio) are nicely positive, in many cases double-digits.  

The coverage ratios and UNII levels for the taxables aren't very valuable given the unrealized gains are not incorporated into net investment income until realized.  For the muni CEFs, they are more valuable.  

For the taxables, as I've said a hundred times, I like to look at NAV changes for indications into distribution health.  

Valuation is clearly another story.  The premium on PDI seems more warranted today than it was a month or two ago given the Fed's pivot.  Still, the NAVs have struggled as of late. I like to look at trailing 30 day periods for clues as to NAV performance.  For example, for PDI the NAV was $27.76, about $0.10 cents above where it stands today.  This during a time of mostly improving credit spreads.  But during the prior 30-day period, the NAV increased by $0.22.  And the 30-day period before that, by $0.30.  So clearly the rate of change (second derivative) is slowing.

A key indicator for us would be it going negative for several 30-day periods.  

Some of the other taxable CEFs look weak on the tax UNII report including PKO.  But the NAV is still positive over the last 30 day period and is comfortably positive over the YTD period with $0.59 of growth.  

Roughly the same dynamic is occurring with PFN and PFL, which both still have nice cushions on NAV YTD growth.  

Still, I probably wouldn't be adding to any PIMCO CEF here.  And I looked back and haven't purchased any shares in almost three months.  There's still a possibility that the market will see this report and sell on it providing another entry opportunity.  But that is looking less and less likely as time passes.  The PIMCOs taxables do tend to sell off around ex-distribution dates (around the 8th-12th of each month).  

In terms of the 'buy under' and 'sell over' figures for the PIMCOs, we will likely do some minor adjusting to incorporate the new interest rate environment.  

Muni Market Update | March 2019

Muni Market Update | March 2019

Executive Summary:

  • Discounts are much tighter than 3 months ago so we've gone from looking for shorter-term trading opportunities to longer-term "holds"

  • Fundamental research is again key as we hunt for those funds that are likely to sustain their distribution for the rest of the year.  

  • We want to avoid distributions cuts as the rest of this year appears to be a coupon +- return environment.

Safe Bucket - Update 2019

Cash Substitutes:

  1. PIMCO Active Enhanced Bond (MINT):  See recent write-up (HERE)

    • Forward yield:  2.72%

  2. Lord Abbett Short Duration Income (LUBAX) (LUBYX):  A moderate fee, very short duration bond fund that is very safe.  

    • Forward yield: 2.73%

  3. iShares Short Maturity Bond (NEAR):  Another highly liquid actively managed (key point) bond ETF with low duration and high quality.

    • Forward yield:  2.84%

  4. Invesco Short Term Bond ETF (GSY): Another liquid, actively managed bond fund with mostly high quality stuff.  

    • Forward yield:  2.53%

  5. SPDR Bloomberg Barclays 1-3 Month T-Bill (BIL):  A liquid treasury ETF that invests in the short-end of the yield curve.  

    • Forward yield: 2.23%

I'm really agnostic about the first four above.  I do tend to favor MINT simply because of the brand name.  NEAR actually has slightly better liquidity though but MINT has more than enough shares traded each day.   

UltraShort Bonds:

These have slightly more risk than a traditional money market fund but are still classified as a 1-rating.  The addition of a few of these options along with PONAX (5.25% yield) can increase the overall yield of your Safe Bucket to over 3%.  

PGIM Absolute Return Bond (MUTF:PADAX):  A higher quality multisector fund that does contain some (<30%) in high yield securities.  

  • Forward yield:  3.44%

Semper MBS Total Return (SEMMX):  An MBS-focused fund with a concentration in non-agency rMBS.  We've highlighted this one several times for its strong risk-adjusted returns.

  • Forward yield:  4.44%

Metropolitan West Unconstrained Bond (MUTF:MWCRX):  This one costs a fee at Fidelity, but it's a decent fund.  The fund has about 20% in HY securities with a mix across sub-sectors to the bond market.    

  • Forward yield:  4.25%

MainStay MacKay Unconstrained Bond (MASAX):  Another low duration blended fund.  About half of the fund is corporate bonds with the rest in government-related securities.  About 27% of the fund is in HY securities with most being in the BB (highest) rated segment.  

  • Forward yield:  3.30%

TCW Strategic Income (TSI):  Our only closed-end fund for the bucket.  This is a low-risk largely corporate bond fund run by a premier manager.  The PMs of the fund toggle back the risk as the economy progresses through the cycle.  TSI yields 5.3% and trades at a 4.8% discount to NAV.  Anytime this fund gets to a -6% discount, we tend to add a few shares if we have excess cash.  Just beware of liquidity as it could take several days to get out of large positions and if you're trying to take advantage of opportunistic selloffs elsewhere in the market, you may miss the boat.  

Some Considerations:

We have been primarily focused on short-duration funds for the last 3-4 years given the low rate environment.  As we approach the end of the cycle, it may be necessary to add some duration to the bucket in order to capitalize on rates falling as we move into a slower (or even negative) growth environment.  

For larger balances where liquidity is not a factor, you could use a TreasuryDirect account and purchase directly from the U.S. treasury-treasury bills and notes.  

We get asked a lot about certificates of deposits (CDs).  1-year CDs, according to bankrate, now average around 2.70%.  Going out any farther than a year does not make sense given the flatness of the curve.  For example, a 2-year CD pays 2.80%, only 10 bps more to have your money locked up another year.  

For those looking to build a ladder portfolio, we still like BulletShares from Invesco (Invesco website here).  The iBonds from Blackrock are also good.  Just be mindful of liquidity. 

Below is the table from Invesco on their BulletShares.  The starting yield-to-worst for the current year fund is approximately 2.64%.  Taxes should be considered here as nearly all of the distribution is considered ordinary income.  For non-qualified account, think about using the iBonds Municipal Target ETFs.

This is the Safe Bucket list of funds from the Google Sheet:

PTIAX, SEMPX/SEMMX, PONAX, and PIGIX should be classified as short-term bond funds with the commensurate risks that come from that space.  We get many questions on why wouldn't we just put most of my safe bucket into a fund like SEMMX which yields much higher than GSY or MINT?  That is because the risk profile is highly different though they can both be rated "1".  SEMMX isn't diversified as it is completely invested into the non-agency MBS space.  

PIGIX, could be substituted with iShares iBoxx Corporate Bond (LQD) for more liquidity.  These two funds have nearly half of their allocation in BBB-rated debt which is the lowest on the quality spectrum.  

Liquidity is also important.  LDUR, while similar to MINT but with slightly more duration and more yield, has much less liquidity.  

Concluding Thoughts

Spreading your bets around is key along with focusing on credit quality and liquidity.  Having all of your safe money in CDs or money-markets makes little sense to me given the lack of flexibility.  But aligning your 'need' with short-term liquid assets while keeping your tactical money- the capital sitting on the sidelines in highly liquid and safe stuff (like MINT).

I think you could easily target a 3%-3.25% overall safe bucket yield and not be reaching very far out on the risk spectrum.  


Weekly Commentary | March 17, 2019

Tech has regained the broader market leadership once again with Apple doing well this past week.  The news on the stock is the expectation of a video streaming service.  Boeing was the big laggard as all of their 737 Max 800 planes were grounded following a second accident.  

Indices for the week were up nicely with the S&P up nearly 3%, Nasdaq up 3.78%, but Dow lagging at +1.64% thanks to Boeing.  Bonds also did well thanks to falling yields with the AGG up 23 bps, high yield up 80 bps, and munis up 17 bps.

Other than the Brexit deal again being delayed, the largest news flow on the week probably came from the retail sales data.  January sales rebounded slightly from that horrible number we saw for December.  However, December's numbers were revised down to -1.6%.  Hard to imagine that people are going to save that much more as wage gains hit the largest figures since 2007.  More likely there's something faulty in the data.  Some suggest the absence of Toys R Us in December could be the culprit.

Bond yields were the other big story.  With consumer prices coming out mid-week showing a 1.5% increase in February, below January's 1.6% pace and slower than expected, inflation is not a concern.  The lower CPI supports the Fed's view for pausing here.

All in all, the reasons for the resumption of the rally are the same as they were two months ago:  an accommodative Fed, restrained inflation, signs of improvement in China, a China trade deal negotiations progressing, and a strong earnings season.

It appeared more that the markets needed a period of consolidation before advancing again.  And while Brexit produced a ton of media attention, it really has little bearing on our markets.  Europe is still a basket case (as it has been for most of the last decade) which is helping to boost the dollar.  Until that reverses, it is hard to imagine international developed stocks outperforming the U.S.  In fact, the US dollar is probably the largest risk to the market as EPS growth for the S&P is already a bit shaky and a higher dollar would reduce that further.

Interest rates continue to inch lower and broke the psychological 2.6% level on Thursday, hitting the lowest level since the start of the year.  


The two-year yield, which is a good barometer for Fed actions, also continues to sink lower.  It has made an incredible move since mid-November when it nearly hit 3%.  

Clearly the lower interest rates along aid our closed-end fund strategy.  The more important figure is the 2-year number, which can be used as a benchmark for borrowing costs for the leverage within the funds.  The lower the 2-year yield, the lower the interest costs, and the greater the earnings power of the fund.  

Closed-End Fund Analysis

Distribution Increase

Blackstone/GSO Sr Floating Rate (BSL):  Monthly distribution was increased by 3.7% to $0.111 from $0.107.

Clough Global Equity (GLQ):  Monthly distribution increased by 6.5% to $0.1123 from $0.1055.

Clough Global Opp (GLO):  Monthly distribution increased by 5.6% to $0.0882 from $0.0835.

Clough Global Div & Inc (GLV):  Monthly distribution increased by 3.4% to $0.1032 from $0.0998.

Distribution Decrease

India Fund (IFN):  Quarterly distribution decreased by 4.8% to $0.59 from $0.62.  

Blackstone/GSO L/S Credit Income (BGX):  Monthly distribution decreased by 1.7% to $0.115 from $0.117.

Blackstone/GSO Strategic Credit (BGB):  Monthly distribution decreased by 0.91% to $0.109 from $0.11.

Tender Offer

Blackrock Debt Strategies (DSU):  The fund announced the start of a 5% tender offer at 98% of NAV.  The tender offer expires on April 15, 2019, 5pm EST.

Activist Trading


Buying:  EIM

Selling:  EIV

SIT Investment Associates

Buying:  FMY


Buying: CUBA

Selling:  LOR




Blackrock Science and Technology II-  The fund filed a N-2 form for an initial public offering on February 28th.  Further details will be released soon.  The fund looks to be similar to BST.  


Discounts continue tighten albeit much more slowly than we saw in January and February.  Over the last 3 weeks, the discounts on bond CEFs have tightened about 22 bps overall ending the week at -4.95%.  This compares to 5.17% at the start of the month and 6.25% in mid-February, the last time CEFA issued their weekly update (and inexplicably stopped issuing the report).  

Munis again did well last week with taxable muni NAVs up nearly 1% and tax-free national munis up 52 bps before falling back Friday ending at the bottom of the list.  Single-state muni NAVs were right behind them near the bottom.  These sectors have moved significantly since the start of the year (and we will have a muni update out next week).  The one-year z-scores for the tax free income single state sector is now +1.3, the richest of any sector.  National munis are second at +1.07. The average discount is down to just over 5%, well in from the 10-15% level we saw in December.

For those with larger (and more tactical portfolios) of muni CEFs, you may want to slowly and lightly begin to trim some positions.  Those z-scores are not anything to worry about and do not indicate a massive overvaluation by any stretch, although some due diligence is needed to decipher which individual funds are expensive and which are not.  

Surprisingly, high yield CEFs are now the next most expensive sector with a +1.26 z-score.  Remember, these z-scores have not yet risen to the egregiously overpriced levels that are typically reflected with a z-score above +2.0. 

If you look at what has a negative value, Real Estate (Global), MLPs, covered calls, and some equity categories are there.  But the level for those z-scores are not very low.  Clearly discounts are not anywhere near where they were two or three months ago and compared to the last year are more on the expensive side.  

This is not a call to go to cash by any means.  But the only purchase I have made in the last 10-12 days was some small allocation to Nuveen Senior Floating Rate (EFR).  Floating rate itself has done what we expected it to do with discounts that are now far tighter than they were in early January when we wrote "Why Floaters Look Attractive Despite Lowered Rate Expectations."

So here we sit, in no man's land, neither significantly overvalued nor significantly undervalued.  Some specific funds remain on the cheaper side:  ARDC, DBL, TSLF, and AFT.  Others remain on the more expensive side:  ECC, PGP, JHB, BGH, PDI, GBAB.  Boring tends to be a good thing in CEF land.  Without any obvious buy candidates and only marginal sell one's, we collect our income stream.  

Multisector Review:

The price performance of the group has been strong and perhaps has masked a bit of the NAV struggles.  And when I say struggles I'm referring to some of the funds that have lagged others.  For the most part, the entirety of the sector has done very well with all funds up YTD.  

Below is the premium/discount of the space.  You can clearly see we are back to where we were prior to the fourth quarter swoon.  That pricing performance is responsible for the strong YTD returns realized in accounts.  

But the NAVs (below) tell a different story.  For example, you can see that PIMCO mortgage funds (PDI)(PCI) are nearer to the bottom of the list.  But the category has a wide range of different types of funds.  FT (Franklin Universal Trust) has a large allocation to equities - mainly energy stocks.  To compare that to PDI which is predominantly mortgages is not an apples-to-apples comparison.  PGP and RA also have large amounts of equity exposure.  

The stand out is BTZ, which is doing very well so far this year.  The combination of steady rates and falling corporate bond spreads have aided the NAV of the fund. 

Mortgage-focused funds like many of those circled haven't zoomed out of the gate at the start of this year like their peers.  However, they also didn't get clobbered like many of the funds that have large allocations to high yield bonds, floating rate, and other higher risk areas of the bond market. 

TSI is a lower risk fund without any leverage so it stands to reason it would lag a bit.  GOF and GGM have significant positions in floating rate securities (mostly outside of the mortgage market) and rates have been stagnant to falling this year.  

We wouldn't draw any conclusions from the data and do not see anything that is a screaming buy.  We tend to keep broad exposure to the space given the diversified sub-sectors of focus.  For instance, PDI, PCI, and DBL give us exposure to the non-agency MBS space we like so much.  BIT and BTZ give us the full spectrum of exposure to the corporate bond market- both investment grade and non-investment grade.  And lastly, TSI is a great safe bucket holding that gives us a fairly low-risk 5.3% yield.  


First, sector performance for the week. 

Here are the stats on the Core funds showing the top and bottom 5 price movers, NAV movers, highest premiums, largest discounts, highest and lowest yields, and z-scores.

We extend that to all CEFs showing the top and bottom 10.



YH Power Rankings Report | March 2019


For those that are familiar with the ESPN NFL Power Rankings, which rank the teams from 1-32 based on the opinions of several staff members, than this analysis will be familiar to you. Here we are ranking the entire CEF universe (~580 funds) using several factors and then applying a scoring methodology to it in order to rank the funds.

We will be doing this each month in order provide a starting point for analysis and due diligence.

What are we looking for here and how are we ranking?

Coverage: > 99%
UNII: > 0 
Yield: Higher is better
Discount: Lower is better
Z-Score: < -1 (lower is cheaper)


In aggregate, we had only 6 funds meet the screen, down from 15 last month and over 40 the month before. We again relaxed the UNII threshold (eliminating it) and the z-score screen to 'lower is better.'  

That widened the field to some 105 funds.

10 Largest Discounts

But where the coverage is above 99% and the shares trade at a discount. Sorted by discount ascending.

Looking Deeper Into Pioneer High Income Advantage (MAV)

This is the sister fund of one we recently sold, Pioneer High Income (MHI).  The funds are very similar but with one key distinction:  the fiscal year end's are one month off.  In other words, the fiscal year end for MAV is March 31 while the year end for MHI is April 30.  

With very similar portfolios, what MAV reports the other (MHI) is likely to report one month later.  In January, MAV announced a sizable distribution cut going from $0.0525 to $0.0425, -19%.  Meanwhile, still MHI has not cut.  

Pioneer (Amundi) is a semi-annual reporter and the last data we have is from the end of September/end of October.  For MHI, the coverage rate is 91% with UNII of 12.7 cents.  For MAV, coverage is now 106.6% (based on the new distribution but earnings from Sept) with UNII around 8 cents.  

If we use MAV as a template for MHI, it is clearly time to get out of the latter as the lower coverage ratio continues to drain UNII.  A cut for MHI is likely imminent.  

So is MAV a good place for that income now that they cut and being one of the few values left in the muni CEF space?  Well, we are in the process of researching for our muni update but looking at the characteristics of the fund itself, it trades at a nice discount thanks to the distribution cut.  What we typically find is that the discount widens for about 2-4 months following a large cut before it bottoms out.  

The yield for MAV is much lower following the cut at 4.82%, vs. 5.32% for MHI.  Of course, MHI wasn't earning that distribution back in September and is unlikely to be earning it six months later either.  We will receive new earnings and UNII data in late May for MAV and late June for MHI.

MAV may look cheap but when we run it through our model, the discount is actually warranted based on its "type" and the yield it produces.  The model essentially looks at all national muni funds and compares them based on discount, yield, whether they are a term trust, perpetual true, or target term, and lastly, among other factors.  

The warranted discount for the fund based on the regression is approximately -7.3%.   Right now, it trades around -8.2% so a bit less than 1% until it gets to our target discount.  Note, that this is about a point higher than the 52-week average of 6.25%.  

While there is a chance that the discount tightens a bit just because of the current state of the muni CEF market.  Most muni CEFs trade tighter than their 1-year average.  We think there's a less than 50-50 shot it gets closer to and trade just above the 52 week average.  This would be at the $10.73-$10.75 level.


MAV is the second best fund YTD on a NAV basis at +2.51% for the high yield muni sector.  The fund that we largely swapped to was Nuveen High Income (NMZ), which was the only fund that bested it at +2.87.

Some data on the fund MAV:

We think there's significant risk given the call schedules of both funds.  Below is MAVs call schedule with 58% becoming call eligible in the next five years, opening them up to the possibility of being replaced by lower yielding issues.  I say 'possibility' because some issues that are call-eligible are not being called for various reasons, including because current yields are not any lower than the current issue.  This is the first time in quite a while that this has been the case.  

Pioneer doesn't break it down by year so all 58% of those calls could be in year 4 or 5 and not effect the portfolio for a number of years- we just don't know.  And uncertainty requires a discount to the average spread the fund would typically trade from NAV.

Concluding Thoughts:

We do not think MAV is a "deep value" muni opportunity but trading near its warranted discount to NAV.  Of course, we could see an influx of buying providing a small bump to the price closing the discount a bit temporarily.  Still, we would avoid both. Our thesis for owning MHI despite that call schedule was based on the fact that they had raised their distributions.  And near-term, the fund that raises the distribution likely has the safest distribution.  Fast-forward a year and things can change.  With MAV cutting, MHI is clearly on the chopping block.  Buyers and holders beware!


Weekly Commentary | March 10, 2019

Believe it or not but the Nasdaq had its first weekly decline since the week of Christmas.  Global equities across the board performed poorly all 5 trading days of the week.  Small caps fared the worst dropping over 4% but remain up 13% for the year.  

  • S&P:  -1.24%

  • DJIA:  -1.70%

  • Nasdaq:  -2.46%

  • Russell 2000:  -4.23%

  • EAFE:  -1.94%

The major news item of the week was the second central bank pivot of the last 3 months.  The European Central Bank announced plans to add additional stimulus as they slashed their forecasts for growth for 2019 to just 1.1% from 1.7%.   

The other major news on the week was the slowdown in the pace of hiring in February with just 20K jobs added.  Clearly, this looks like a fluke and likely to be revised higher.  In addition, January was an abnormally large job gain number and the two months averaged together still amounts to over 180K.  The unemployment rate fell to 3.8%.  

Interest rates fell every day last week from 2.76% ending the week down around 2.62%, the lowest since January 4th, in response to weak data and the ECB announcement.  Muni bonds rallied as well.  Meanwhile, credit spreads widened across all maturities and credit sectors.

The VIX popped back above 16 reversing the downward trend it had been on for some time.  


JPM US macro outlook – consolidating for now before resuming the rally by the spring – the SPX has entered a period of digestion for the time being but the YTD rally likely is only taking a pause (instead of concluding) and a sustainable break above 2800 remains probable. This consolidation phase should confine to the SPX (approximately) within the ~2750-2800 band (w/some brief and mild overshoots in both directions). o Why a consolidation is occurring right now - this market requires digestion after spiking ~20% trough-to-peak over the last two months and after fully absorbing the big tree YTD fundamental tailwinds (earnings, the Fed, and China trade), the SPX has run out of reasons (for now) to rally further. Valuations aren’t cheap and the SPX doesn’t seem comfortable paying north of ~16x right now and this is why ~2800 is proving to be a tough ceiling (based on the ~$172 2019 EPS consensus). The ~2800ish level has been resistance going back to Oct and Nov (and keep in mind the ’19 EPS consensus was ~$178 at that time). Renewed GE anxieties (sparked by the CEO’s presentation at JPM’s ATI conf. on Tues 3/5) are having macro implications for the market as they resuscitate the “fallen angel”/HY worries from Dec. The stock market is being forced to digest an enormous amount of paper and the pipeline going forward is huge (the SPX is actually holding up well considering all this supply). The USD spike (exacerbated by Draghi and the ECB on Thurs) is incredibly unhelpful for equities (as it creates a growing EPS headwind). Finally, there just aren’t many major macro catalysts for a few more weeks (FOMC on 3/20 and the possible Trump-Xi signing ceremony on 3/27).

Closed-End Fund Analysis

Distribution Increase

PGIM High Yield (ISD):  Monthly distribution increased by 17.6% to $0.010 from $0.085.

PGIM Global High Yield (GHY):  Monthly distribution increased by 21.2% to 0.10 from $0.0825.  

Distribution Decrease


Fund Name Change

Dreyfus is changing the name on all their funds to reflect their parent company Bank of NY/Mellon.  Mellon purchased Dreyfus way back in 1993 and they obviously think the Bank of NY/Mellon brand is stronger.  



From a NAV perspective, munis did well this week with the average fund seeing a 0.52% increase in value.  This was driven by the flight to safety as investors piled into treasuries and other safe assets (like munis) pushing down the yields.  

Taxable munis actually led the way with a nearly 1% gain on the week PLUS a drop in price sending discounts wider by over 1.2%.  There are only three funds in the space now so movements can be exacerbated.  Still, BBN saw its price rise by only one cent but the NAV jumped 21 cents.  GBAB was another with a nicely rising NAV- however, its price fell be nearly 20 cents.  Hence GBAB being a top 5 NAV mover but a bottom 5 price mover.  The space remains a bit overvalued.  

MHI, PPT, and WEA were all top movers in the Core on the week.  Investors are starting to realize the value in PPT helping to drive up the price.  MHI saw renewed interest (though we don't own any) from the move towards munis.  WEA was one we've discussed on the chat frequently in the last two weeks.  As I noted there, I really want to see a strong value with the discount closer to -9%.  They did recently announce their next three months of distibutions.

One fund that continues to look interesting is the EV Tax-Managed Global Fund (EXG) which was the lowest z-score on the list below at -2.0.  The fund cut the distribution at the start of the year and the discount has been widening ever since.  It is now well below the 1-, 3-, and 5- year discount averages.  For those looking for global equity exposure with tax efficiency, this is a good fund to look at.  Beware, it does have larger than average technology exposure.  

Lastly, Eagle Point Credit Company (ECC), a CLO fund, reported its monthly NAV last week.  The value of the underlying assets rose by 10.6% to $13.71 leaving the premium at 22.8%.  The price is down to $16.83, from a peak this year of $17.50 set on February 22nd.  The price is following the broader markets anticipating the NAV movements, which are only reported about a week following month-end.  To me, this fund appears overvalued still at +22%.  The average premium is right around 11%.  In addition, with markets being down so far in March, if the NAV were to print right now, it would likely be down low-single digits meaning the premium is actually somewhere in the mid-to-high 20s%.

As we noted in Friday's trade alert the two Prudential closed-end funds (Prudential Asset Management was renamed to PGIM last year) made a change in their investment policy and shifted their names.  PGIM Short Duration High Yield (ISD) and PGIM Global Short Duration High Yield (GHY) were renamed without the 'short duration'.  PGIM High Yield (ISDand PGIM Global High Yield (GHY). 

In addition, they increased the distributions by 17.6% and 21.2%, respectively.  

PGIM also removed the restriction on how much CCC-rated debt they can hold.  Previously, they could only only 10% in the lowest rated credit quality level.  That limit was completely removed.  

The new distribution yields will be 8.51% for ISD and 8.63% for GHY based on closing prices on Thursday.  



Concluding Thoughts on PGIM:

The company is doing two things here:  1) they are allowing them to get junkier in terms of their holdings.  Clearly the funds have been penalized for not having a competitive distribution rate primarily because they focus on the highest quality non-investment grade holdings.  By removing the cap, they can increase the distribution and perhaps close the large discounts.  The question is whether this is a good time in the cycle to be adding CCC-rated debt.        2)  They are adding duration by removing the "short duration" from the names of both funds.  At this point in the cycle, it is probably a good thing to add some duration.

All in all, I do think ISD is worth a look for a short-term trade.  The shares trade at a 12.4% discount to NAV which isn't as attractive as it was before the trade alert but still fairly wide compared to most of the peers. 

PIMCO Annuals

PIMCO released their semi-annual reports a couple of weeks ago.  We spent some time going through them but there wasn't much new to glean from them.  

Net investment income was steady for the six month period in the back half of 2018.  PCI did slightly better than PDI with NII of $1.01 ($2.02 run rate) for the six months, compared to $1.95 for the fiscal year 2018 ending in June 2018.  PDI generated NII of $1.34 ($2.68 run-rate) compared to $2.95 in FY2018.  In other words, PCI is doing slightly better than the prior trend while PDI is slightly below.

PCI had net realized/unrealized gain (loss) were negative for the year with a loss of $1.02.  PDI lost $1.34.  These are the largest losses since FY 2016, the last time high yield saw a significant decline.

In going through the holdings, there was nothing much new that needs to be noted.  It is still primarily non-agency MBS with another chunk in asset backed securities.  

Now, on the to juicier part:  their interest rate swaps and hedging.  It is interesting that they've actually lost money on hedging- at least on their unrealized portions.  Given the jump in coverage for PCI in January, it could be that they liquidated some swaps that did have sizable gains.  

Right now, it is difficult to tell what exactly is going on.  

It appears that they've offset some of the hedges to higher rates that they have put on.  

All-in-all, nothing material in terms of changes.  I'm going to try and get more color on their hedges and what they are trying to accomplish there.  The fact sheet from December 31 states that they were short the long end of the curve but "continue to see duration as a source of diversification and will continue to scale exposure into changing valuations and macroeconomic developments."


First, the stats on the Core funds showing the top and bottom 5 price movers, NAV movers, highest premiums, largest discounts, highest and lowest yields, and z-scores.


First, the stats on the Core funds showing the top and bottom 5 price movers, NAV movers, highest premiums, largest discounts, highest and lowest yields, and z-scores.



YH CEF Report March 2019 | Distribution Cuts Pick Up, But So Do Increases

In March, we saw 17 funds boost their distribution by 2% or more while 30 funds cut their distribution by 2% or more.  Of the increases, 7 of the funds were munis while another 7 were floating rate.  We have been bullish on both of these spaces (though recently less so for the munis as discounts have tightened significantly).  

Floating rate remains an unloved area but the corner may have been turned.  For one, inflows are returning meaning that money isn't flowing out of the sector any longer.  We've been pushing these since December as we saw a significant opportunity and issued a report titled "Why Floaters Look Attractive Despite Lowered Rate Expectations."  Essentially, there was a "double discount" opportunity whereby the underlying loans were priced at a significant (for the sector) discount to par PLUS the funds themselves were at a discount to NAV- with the average being right around -10%.

Floaters continue to be the larger pieces to our Core Portfolio with large allocations to Ares Dynamic Income (ARDC)KKR Income Opportunity (KIO), and Apollo Tactical Income (AIF).  In addition, our high yield fund looks poised to break out with Ivy High Income (IVH) returning 8.64% on NAV and 13.7% on price YTD.  IVH also has a corporate action kicker with Saba (CEFS) building a large position in it.  They own 1.3M shares or approximately 8% of the outstanding shares.  On the most recent filing, they put up an issuer proposal to declassify the board.  This is an initial step towards some sort of shareholder-friendly event.  

On March 1, we highlighted some of the Eaton Vance floating rate funds in our monthly letter including EV Senior Floating Rate (EFR).  Later the same day, the fund increased the distribution by 5.6%.  That is a fund that has coverage above 110% with UNII of nearly 11 cents.  

Blackrock Floating Rate (FRA) was one of our top three picks for February based on the same sort of dynamic:  It was oversold, we liked the sector, and the fundamentals (coverage, UNII, etc) looked stellar.  The fund also raised the distribution in March by 7.75%.  

Distribution Increase ( > 2%)

Nuveen NC Quality Muni (NNC) - Monthly dividend increased by 8.33% to $0.039 from $0.036 per share.

*Blackrock Floating Rate Strategic Income (FRA) - Monthly dividend increased by 7.75% to $0.0695 from $0.0645 per share.

Nuveen PA Quality Muni (NQP) - Monthly dividend increased by 7.45% to $0.0505 from $0.047 per share.

Nuveen GA Quality Muni Inc (NKG) - Monthly dividend increased by 7.25% to $0.037 from $0.0345 per share.

Nuveen Intermediate Dur Quality Muni Trm (NIQ) - Monthly dividend increased by 6.78% to $0.0315 from $0.0295 per share.

EV Senior Floating Rate Trust (EFR) - Monthly dividend increased by 5.63% to $0.075 from $0.071 per share.

*Nuveen Muni Hi Income Opp (NMZ) - Monthly dividend increased by 5.31% to $0.0595 from $0.0565 per share.

Blackrock NY Muni Bond (BQH): Monthly distribution increased by 4.35% to $0.048 from $0.046.

EV Floating Rate Income Tr (EFT) - Monthly dividend increased by 4.23% to $0.074 from $0.071 per share.

EV Senior Income Trust (EVF) - Monthly dividend increased by 3.13% to $0.033 from $0.032 per share.

MFS Special Value (MFV): Monthly distribution increased by 3.13% to $0.04513 from $0.04376.

MFS CA Muni (NYSEMKT:CCA): Monthly distribution increased by 2.94% to $0.035 from $0.034.

Nuveen Senior Income (NSL): Monthly distribution increased by 2.74% to $0.0375 from $0.0365

MFS High Income (CIF): Monthly distribution increased by 2.52% to $0.01997 from $0.01948

EV Floating Rate Income+ (EFF): Monthly distribution increased by 2.5% to $0.083 from $0.081.

Templeton Global Income (GIM): Monthly distribution increased by 2.24% to $0.041 from $0.0401.

EV Floating Rate 2022 Target Term (NYSE:EFL)- Monthly dividend increased by 2.22% to $0.046 from $0.045 per share.

Distribution Decrease (> 2%)

JH Income Sec Trust (JHS) - Quarterly dividend decreased by 27.0% to $0.1522 from $0.2085 per share.

Blackrock FL Muni 2020 Targeted Term (BFO)- Monthly dividend decreased by 23.08% to $0.02 from $0.026 per share.

JH Investor Trust (NYSE:JHI) - Quarterly dividend decreased by 22.39% to $0.2458 from $0.3167 per share.

Royce Value Trust (RVT) - Quarterly dividend decreased by 21.62% to $0.29 from $0.37 per share.

Blackrock Muni Bond (BBK) - Monthly dividend decreased by 14.17% to $0.0545 from $0.0635 per share.

Blackrock MuniHldg Qlty Fd (MUS) - Monthly dividend decreased by 11.88% to $0.0445 from $0.0505 per share.

Nuveen Tax-Adv Total Return Strat (JTA) - Quarterly dividend decreased by 11.11% to $0.24 from $0.27 per share.

Nuveen Hi Income Nov 2021 Targeted Term (JHB) - Monthly dividend decreased by 10.75% to $0.0415 from $0.0465 per share.

Nuveen Hi Income 2020 Targeted Term (JHY) - Monthly dividend decreased by 10.26% to $0.035 from $0.039 per share.

Nuveen Core Equity Alpha (JCE) - Quarterly dividend decreased by 9.91% to $0.25 from $0.2775 per share.

Invesco Muni Opp Tr (VMO) - Monthly dividend decreased by 9.75% to $0.05 from $0.0554 per share.

Nuveen Diversified Div & Income (NYSE:JDD) - Quarterly dividend decreased by 9.38% to $0.2175 from $0.24 per share.

Invesco Adv Muni Income Tr II (VKI) - Monthly dividend decreased by 8.72% to $0.045 from $0.0493 per share.

Invesco Investment Grade NY Muni (VTN) - Monthly dividend decreased by 8.66% to $0.0506 from $0.0554 per share.

MuniEnhanced (MEN) - Monthly dividend decreased by 8.33% to $0.044 from $0.048 per share.

Blackrock MuniYield CA (MYC) - Monthly dividend decreased by 7.69% to $0.048 from $0.052 per share.

Nuveen Tax-Adv Div Growth (JTD) - Quarterly dividend decreased by 7.46% to $0.31 from $0.335 per share.

Nuveen Rel-Estate Income (JRS) - Quarterly dividend decreased by 7.32% to $0.19 from $0.205 per share.

Nuveen Nasdaq 100 Dynamic (QQQX) - Quarterly dividend decreased by 7.14% to $0.39 from $0.42 per share.

Blackrock MuniHldg Inv Qlty (NYSE:MFL) - Monthly dividend decreased by 7.08% to $0.0525 from $0.0565 per share.

Blackrock MuniVest II (MVT) - Monthly dividend decreased by 6.3% to $0.0595 from $0.0635 per share.

Nuveen NY Select Tax-Free Income Port (NXM) - Monthly dividend decreased by 5.95% to $0.0395 from $0.042 per share.

Invesco CA Val Muni Income (VCV) - Monthly dividend decreased by 5.69% to $0.0481 from $0.051 per share.

Nuveen S&P 500 Dynamic Overwrite (SPXX) - Quarterly dividend decreased by 5.36% to $0.265 from $0.28 per share.

Nuveen S&P 500 Buy-Write Income (BXMX) - Quarterly dividend decreased by 5.1% to $0.2325 from $0.245 per share.

Nuveen Dow 30SM Dynamic Overwrite (DIAX) - Quarterly dividend decreased by 4.84% to $0.295 from $0.31 per share.

Nuveen Global High Income (JGH): Monthly distribution decreased by 4.7% to $0.102 from $0.107.

Nuveem MN Quality Muni (NMS): Monthly distribution decreased by 3.92% to $0.049 from $0.051.

Invesco Quality Muni (NYSE:IQI): Monthly distribution decreased by 2.82% to $0.0516 from $0.0531.

MFS High Income Muni (CXE): Monthly distribution decreased by 2.2% to $0.022 from $0.0225.

Distribution Policy Change

Gabelli Global Small & Mid Cap (GGZ): The fund shifted to a quarterly distribution policy for the fund's shareholders. The initial payment $0.14 on March 22, 2019.


EV NJ Muni Income (EVJ) and EV Muni Income Tr (EVN). The NJ Muni fund will merge into EVN as of the close on Feb 22, 2019.

  • The exchange ratio at which common shares of EVJ were converted to common shares of EVN is listed below: Acquired Fund (Trading Symbol): Eaton Vance New Jersey Municipal Income Trust (EVJ), Exchange Ratio: 1.033252458

  • Fractional shares of EVN common stock were not issued in the merger and consequently cash will be distributed for any such fractional amounts.

EV Muni Bond II (EIV) and EV Muni Bond (EIM) shareholders approved the merger of EIV into EIM. Its expected to be completed by the end of the day March 22, 2019. Each EIV shareholder will be issued shares of EIM at an exchange ratio based on the funds' NAVs.


RiverNorth Opportunities Fund II- The Fund filed a SEC form N-2 for an Initial Public Offering of common shares on February 25, 2019.

Tender Offer Period

Blackrock Debt Strategies (DSU): The fund announced the results of the second measurement period under its discount management program expected to end next year.

  • As previously announced, under the Program, the Fund intends to offer to repurchase its common shares based on three 3-month measurement periods (each a "Measurement Period") if the Fund's common shares trade at an average daily discount to net asset value ("NAV") of greater than 7.5% during a Measurement Period (a "Trigger Event"). The Fund’s second Measurement Period commenced on December 1, 2018 and ended on February 28, 2019 (the "Second Measurement Period").

  • The Fund’s Board of Directors (the “Board”) determined that if a Trigger Event occurred during the Second Measurement Period, the Fund would offer to repurchase its outstanding common shares by conducting a tender offer for 5% of its outstanding common shares at a price equal to 98% of the Fund’s NAV per share as determined as of the close of the regular trading session of the New York Stock Exchange ("NYSE") on the day after the tender offer expires. During the Second Measurement Period, the Fund's average daily discount to NAV was -12.9%.

  • As a result, the Fund expects to commence the tender offer on or about March 15, 2019, with the expiration of the tender offer currently anticipated to be on or about April 15, 2019.


Discounts continue to tighten across the entire CEF space with the average discount on the fixed income side down to 5.16%  Just two weeks ago it was at 6% according to CEFA.  And during the week of Christmas, the average discount on the bond side was a crazy -12%.  So clearly we've come in strongly in the last two months as the dynamics that setup the sharp decline reversed course in early January.  Those being the tax loss selling and the rebound in the market (fall in the VIX).  

Below is general sector information on the CEF space.  General equity did the best on NAV for the month of March and still sports a negative one year z-score.  Our call on the loan space seeing some discount closure is starting to play out.  In the table below the senior loan category saw 1.66% of discount tightening, the second largest of any category.  

After a rough fourth quarter for investors, we have realized a V-shaped recovery as both NAVs have rebounded and discounts tightened.  This is not the volatility that many investors had signed up for when they ventured into CEFs.  But if the investor knows how to use them and combine them in a broader income-based portfolio, the rewards by adding during swoons like December can be significant.  We wrote in our March letter and on the public side a piece directed at our investment strategy "LDI Investing Is No Longer Just For Pension Funds."  CEFs are an integral part of this strategy.  

Right now, CEFs are expensive but NAVs are moving up nicely so I'm not overly concerned.  I did lighten up a bit and get cash back to our traditional long-term levels after using it all up in December (and even going ever so slightly into margin).  So overall I'm about at average levels though I did start to trim a few other positions and move them to open-end mutual funds for the time being.  


YH Convergence Trade Report | March 2019

YH Convergence Trade Report - March 2019

A convergence trade is a closed-end fund that is trading at a wider-than-usual discount and is likely to close that discount. On some occasions, the discount is warranted, most likely because they cut the distribution. Other times, they are trading wide because of the sector being out of favor or general market weakness.

In the January Muni Market Update we had five funds that we said to 'buy today for the discount capture'.

Buy Today For Discount Capture:

  • Nuveen High Income Opps (NMZ)

  • Eaton Vance National Muni Opp (EOT)

  • Delaware Invest CO Muni Income (VCF)

  • Blackrock MuniYield Invest (MYF)

  • Blackrock Muni Income Inv (BBF).

Below is MYF, which shows a strong V-shaped recovery in the last 7 weeks. How did we identify it? The yield was attractive enough at the wide discount for it to garner a bunch of interest from shareholders. Additionally, the fund had just cut and was unlikely to cut again. Third, the variance between the current discount and the average discount was substantial. Of the Blackrock funds, it was the only one that sold at a premium in the last twelve months. So there was a lot of pull for the discount to close.


We look at our table to see those funds that are trading well below their 52-week average. We further looked at how far off fund were from their 52-week highs. Given the favorable Fed backdrop - basically a green light for CEFs- we think it is highly possible that they re-reach those 52-week highs in premiums.

Please note, this is not a blanket buy recommendation of these funds but a starting point for further analysis.

There is a lot of data below- do not be intimidated! The keys here are the two grey columns on the right side of the table. The "convergence opp" column (third from the right) shows the amount of potential discount closing if the fund were to get back to their 1-year discount (recall that we said we thought discounts could exceed their 1-year levels and approach 52-week highs). The second to last column (green labeled "52W Disc High %") on the right shows the 52-week high in discount/premium. The last column shows the amount of discount tightening that would be needed in order for it to reach those 52-week highs again.

Remember, sometimes discounts exist for a reason - most likely because the distribution has been cut. I'd love to start a discussion and get a conversation going on some of these opportunities. Please leave comments below or join us on the chat during the market hours.

For those that are looking for a quick and reduced universe of funds to investigate, check out these funds. Watch for those that have recently reduced their distribution.

Again, if you think you've found a gem in the rough, comment below or send me a quick personal message and we dig deeper.


Weekly Commentary| March 3, 2019

Stocks again moved higher for the longest weekly gains in nearly 25 years.  Materials and utilities were the leading sectors.   The S&P was up 0.65% with the Nasdaq up 0.74%.  Small caps rose by 1.34%.  For the year, the S&P 500 is now up 11.74% and the Russell 2000 is up 18.08%.  

In fixed income the Barclay's AGG rose another 11 bps and is up 1.21% on the year while high yield gained another 35 bps to 5.89% on the year.  Munis were also up on the week approximately 16 bps and are now up 1.21% YTD.

Interest rates continue to hold in a tight range between 2.65% and 2.72%.  We still do expect them to break out on the higher side.  Of course, with the market zooming and due for at least a period of consolidation if not a small pullback, there is a shorter-term risk to that forecast.

Oil was up another $2.50 on the week and hit $58 briefly Thursday before pulling back a little.  Meanwhile, the all-important VIX fell to a 13-handle on Thursday but rose slightly to 14 by the close on Friday.  That is down from 15.6 at the end of last week.  

The key news on the week was the progress being made on the trade front with President Trump stating that the March 1st deadline was flexible as they near a deal.  We also got the Fed minutes this week for the January meeting which stated that all participants thought it was a good idea to stop reducing the balance sheet later this year.  Officials also noted that they favored a patient approach to monetary policy that would allow them to monitor the data.

SPX macro update – US equities headed for a period of digestion but the SPX should stay within 2750-2800 - the bar to impress the SPX is much higher than it was back in H2:Dec and H1:Jan and thus the index could struggle for the time being. At this point it would take the instant removal of existing US-China tariffs, a sharp upward inflection in Chinese growth, and ending reserves on the Fed balance sheet of ~$1.3T to “surprise” US investors on the upside. The 2019 SPX EPS consensus remains ~$172.50 (on Thomson Reuters) and the present PE isn’t ridiculous (16.1x) but it isn’t extremely cheap either. Positioning/sentiment are still tailwinds but not nearly to the extent they were a few months ago. The SPX will likely break up through 2800 by the summer but the path forward won’t be as linear as it was since 12/26 and a trip back towards ~2750 could easily occur during the upcoming period of digestion.

• The ingredients for a break in the SPX above 2800 – the following macro developments need to occur to get the SPX north of 2800: 1) the Fed confirms plans to complete balance sheet normalization by the end of 2019 and commits to keeping reserves at $1.25T or more; 2) the Fed more explicitly signals the end of rate hikes (this has been strongly suggested but the recent minutes left the door open to additional tightening actions); 3) the ECB delivers on the market’s LTRO expectations; 4) Chinese growth continues to stabilize and inflects higher; 5) the US and China reach a trade compromise and Trump avoids other trade-related battles (in particular, Trump backs away from his auto threats); and 6) US growth momentum doesn’t decelerate dramatically. Bottom Line: this scenario is likely to occur but it may not be apparent for a few more weeks and thus the SPX will likely tread water for the time being.


We still continue to believe that at least one rate hike is likely this year - probably at the June meeting.  But it will be highly dependent on the market expectations.  Chairman Powell learned his lesson about going against market sentiment when raising rates.  

From a technical perspective, the market continues to break out and approach new highs but I do fear a 'sell the news' rally should we get a deal with China.  In addition, earnings will be fairly flat this year which should prevent a large multiple expansion in the index capping the upside from here a bit.  

Closed-End Fund Analysis

Distribution Increase

Western Asset High Income Opp (HIO):  Monthly distribution increased by 9.4% to $0.029 from $0.0265.

Gabelli Health & Wellness (GRX) increased their quarterly distribution by 7.7% to $0.14 from $0.13.  

Western Asset Global High Income (NYSE:EHI):  Monthly distribution increased by 1.6% to $0.062 from $0.061.

Western Asset High Income II (HIX):  Monthly distribution increased by 1.1% to $0.046 from $0.0455.

Distribution Decrease

First Trust Sr Floating Rate 2022 Target (FIV):  Monthly distribution decreased by 15.4% to $0.0353 from $0.0417.  

Wells Fargo Global Div Opp (EOD):  Quarterly distribution decreased by 3.5% to $0.14881 from $0.15413.


Special Opportunities Fund (SPE):  Shaker Financial is building a position and now owns 5.02% of the shares.

Blackrock Funds:  Karpus is building a position in several funds including MYI (6.7% of shares), BKT (16.3%), BYM (5.51%), MHN (5.44%)

High Income Securities (PCF):  This formerly Putnam run fund has Karpus owning 9.5% of the shares.

1607 Capital Partners LLC

 The hedge fund is building positions in Aberdeen Emerging Market Equity (AEF) where they own 7.5% of the shares.  Aberdeen Total Dynamic Div (AOD)- 8.24% of shares, Aberdeen Japan Equity (JEQ)- 21.15%. Korea Fund (KF) - 9.2%.  Blackrock Enhanced Global Div (BOE) - 5.51%.  European Equity Fund (EEA) - 20.3%.  D&P Utilities (DUC) - 5.07%.  First Trust Dynamic Euro (FDEU) - 5.01%.  EV Short Duration (EVG) - 5.64%.  JH Investors (JHI) - 8.2%.  JH Income Sec (JHS) - 6.26%.  MFS Ind Income (MIN) - 8.95%.  MFS Emerging Market (MSF) - 7.58%.  

Karpus Capital Management

 Building positions in D&P Utility Corp (DUC) - 14.6%.  EV CA Muni Income (CEV) - 6.35%.  EV Muni Bond (EIM) - 10.4%.  EV NY Muni (ENX) - 5.9%.  Aberdeen Global Opp (FAM) - 12.4%.  Gabelli Health and Wellness (GRX) - 5.6%.  High Income Securities (PCF) - 9.4%.  JH Tax-Adv Global (HTY) - 11.9%.  Western Muni High Income (MHF) - 5.9%.  Nuveen AMT-Free Quality (NEA) - 5.2%.  Nuveen NY AMT- Quality (NRK) - 8.1%.  Nuveen NY Muni Val (NYV) - 7.1%.  Pioneer Div High Income (HNW) - 7.3%.  Prudential Global Sh Duration HYY (GHY) - 5.75%.  


Senior loans (a.k.a Floaters) finally saw some material discount closing this past week.  Most of that came on Thursday and Friday as prices jumped over 1% in many cases.  The driver for it is unclear.  It could be that it was the last bastion of value in the bond space of the CEF market.  Or perhaps sentiment is shifting a bit given the rebound in the equity markets that another rate hike (or more) is back on the table.

We will be issuing a separate report in the next day or so in the floating rate space with some top trades.  I'll try to get it out as soon as possible.  

We would just note that it pays to be patient when holding these securities.  The Leveraged Loan Index still sits at or just below $97 so there's an opportunity for more NAV gains, in addition to the pricing gains we've seen this past week.  If you look at the sector list in the statistics section, you can see that while senior loan NAVs rose about 54 bps, prices rose by 250 bps, closing the average discount by 2 points.

Moving On....

We now have many funds that are under a 'sell flag' for the first time in over 7 months.  This is not unusual given the sentiment driven nature of the closed-end fund space.  At various times, we have a dearth of buyers that can send prices plummeting and discounts widening (December is a great example).  At other times, there are no sellers and even a marginal amount of new money can send prices higher and discounts tighter.  

Investors need to make a choice here if they want to continue to collect income and hold, or sell and move into something else while waiting for better valuations.  The problem with the latter, which is more of a total return approach, is it can take months if not longer for those valuations to present themselves.  

We noted on the chat that members are susceptible to some groupthink and to be careful you do not become too conservative.  Many members are selling and raising large amounts of cash.  If that is part of your overall portfolio plan, then so be it.  But do not stray far from your target allocations just because we rebounded to where we were in late September (or near it).  Funds can continue to see increasing demand and rising values for a long period of time. 

In 2016 and 2017, we saw very little volatility and 'cheapness' after nearly two years of it prior (2014-to-early 2016).  In other words, after what was a painful quarter, we could be done with the pain for a while.  Obviously it is impossible to know that.  Just a word of caution.  

While I continue to trim our holdings a bit, each needs to consider what is their personal situation. Are you retired?  Are you in accumulation mode?  Are you drawing on the portfolio?  How risk averse are you?  What is the need for yield like?  If that yield were cut in half, what would happen?  

I sit on about 15% cash (just a hair above the long-term average I have typically held).  This past week I sold IHTA, HYI, a small amount of VPV, PCI, and PDI.  I did add to TSLF, DHY, LOR, and PPT.

Nuveen Update

Nuveen released their January numbers on Friday.  The muni side showed a continuation of prior trends with some UNII build and coverage improvement.  Remember, Nuveen cut their muni CEF distributions significantly over the last year-plus in an effort to stem the 'call problem' and rebuild UNII.  That appears to be working well.  

The top coverage on the national muni side is (NMZ) which increased coverage to 108.1%, up 2 points from last month.  UNII also continues to increase and is now at 2.7 cents, up from 2.2 last month and a negative reading back in August of last year.  It remains our top pick.

Other funds that are doing well from a fundamental standpoint are NAD, NIM and NXC (CA muni).  That doesn't mean they are cheap by any means.  

Nuveen Muni CEF UNII:

Nuveen Muni Coverage Ratio:

Update On MINT (Safe Bucket Holding)

PIMCO Enhanced Short Maturity Active ETF (MINT) is our preferred cash-substitute.  That does not mean it is pure cash or as safe as cash but it exhibits "cash like" characteristics in terms of volatility and credit risks.  I think the best way to demonstrate the risks are through a series of charts related to performance.  

The first is the total return in price from the market peak in late September through the trough on Christmas Eve.  You can see for most of the downturn, MINT was rising in value.  The fund peaked in mid-November and then rolled over in December.  But the y-axis (right side) shows you the level of volatility.  The fund went from a +0.24% increase and fell back to +0.18% for a difference of just 6 bps.