Corporate bonds are undeniably thriving in today’s market landscape. However, the window of opportunity is still wide open for savvy investors to capitalize on high-yield corporate bonds through select closed-end funds (CEFs) trading at discounted prices.
Even the perpetually pessimistic voices at Business Insider, known for their doomsday predictions of impending economic crises, have been forced to acknowledge the remarkable strength of the bond market. Recently, Business Insider begrudgingly admitted that “Corporate bonds are experiencing unparalleled safety,” painting a glowing picture of the current bond market.
According to Financial Times, there has been a significant influx of funds into US corporate bonds, with investors shifting towards higher-yield corporate bond products. This shift in investor behavior is driven by the allure of attractive yields in today’s market.
Corporate-Bond Yields Surge
As the Federal Reserve embarks on a rate-hiking cycle, bond yields, as illustrated by the average yields on Aaa and Baa-rated Moody’s bonds, have seen a substantial uptick. Despite the common correlation between rising yields and increased default risks, the current low default rates of private credit and investment-grade corporate bonds suggest a favorable environment for high-yield bond funds.
With default rates hovering around historically low levels, skilled bond fund managers have the opportunity to curate portfolios that yield generous returns while avoiding potential defaults. Funds like PTY have exemplified this strategy, outperforming benchmarks and providing impressive returns to investors.
PTY’s Long-Term Success in a Low-Yield Environment
PTY’s track record of outperforming stocks while maintaining robust payouts, currently yielding at an enticing 9.6%, underscores the potential of adept management in navigating challenging market environments effectively.
PTY’s Reliable Dividend, With “Bonus” One-Time Payouts
Even during periods of low interest rates, PTY managed to deliver special dividends, indicative of its strong performance. As yields climb and default risks remain contained, PTY is poised to sustain its generous payouts in the foreseeable future.
Higher Rates = Easier Dividend Coverage for Everyone
In contrast to PTY’s aggressive trading approach, funds like EVV and DHY emphasize a strategy focused on avoiding defaults by holding bonds for extended periods. This cautious approach has enabled these funds to outperform broader corporate-bond indices and generate reliable dividends.
EVV and DHY Outrun the Broader Bond Market
Although EVV and DHY have exhibited more modest returns compared to PTY due to longer holding periods and lower pre-pandemic yields, the current market conditions, characterized by higher bond yields, provide a conducive environment for sustainable dividend payouts.
Amidst the current pricing dynamics, the discounts offered by EVV and DHY, at 8.2%, present attractive investment opportunities. These funds, equipped to capture high yields in today’s market, are positioned to deliver substantial returns to investors.
The projected decline in interest rates is expected to enhance portfolio values for DHY and EVV, while preserving locked-in yields. This shift could potentially result in premium valuations for these funds, offering investors a favorable exit point at a later stage.
5 More Big-Yielding CEFs to Ride the Bond Boom (and the Next Big Megatrends)
EVV and DHY exemplify the potential of CEFs in capitalizing on market fluctuations, particularly in high-yield corporate bonds, at discounted prices. By focusing on dividend income, CEFs provide an added layer of security amidst market volatility.
While the allure of low-fee ETFs persists, the hidden gems of CEFs offer investors substantial yields and discounts that have the potential to attract a wave of new investors seeking higher income streams in a low-rate environment.
“By embracing these funds now—starting with my top 5 CEF picks (averaging an impressive 8.6% yield!), investors can position themselves ahead of the curve.”
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Also see:
• Warren Buffett Dividend Stocks
• Dividend Growth Stocks: 25 Aristocrats
• Future Dividend Aristocrats: Close Contenders
The perspectives expressed in this content are those of the author and do not necessarily align with the views of Nasdaq, Inc.
