Bond Market Blues: A Buying Opportunity for Savvy Investors
The bond market has been in a tailspin for months, leaving closed-end bond funds in a precarious position. With bond prices plummeting, leverage costs rising, and investors scrambling to cut their losses, many of these funds are now trading at significant discounts to their net asset value. This perfect storm has created a rare buying opportunity for investors willing to take on the risk.
A Double Whammy for Closed-End Funds
Many closed-end funds are leveraged, meaning they borrow money at short-term rates to invest in long-term bonds. This strategy can be a double-edged sword. If interest rates continue to rise, the funds’ debt costs will increase, putting pressure on their net assets. On the other hand, if the Federal Reserve cuts rates, the funds’ debt costs will decrease, giving them a triple win: their bond investments will rise, their share price will increase, and their debt costs will plummet.
Discounted Prices, Attractive Yields
As of Tuesday’s close, 30 closed-end funds were selling for 90 cents or less per dollar of investments, with 23 paying out distribution yields of 5% or more. For example, the AllianceBernstein National Municipal Income Fund was trading at a 12% discount, with a 3.9% distribution yield. The MFS Municipal Income Trust was trading at an 11% discount, with a 4.65% distribution yield.
A Tactical Opportunity
According to Larry Glazer, managing partner of Mayflower Advisors, “Bonds have gone nowhere for years, and the recent increase in interest rates and poor sentiment in the bond market have created a double whammy on closed-end funds, and a buying opportunity for many.” With year-end tax-loss selling dynamics exacerbating the situation, investors may be able to snag a bargain.
Caveat Investor
While the discounts and yields may be enticing, investors must do their due diligence and acknowledge that the market rarely offers something for nothing. Closed-end funds come with risks, and investors must be prepared for the possibility of losses if the bond market continues to decline.
Examples of Discounted Funds
- BlackRock Muni Quality Yield II: trading at 89 cents on the dollar, with a 6.2% distribution yield
- Neuberger Berman Municipal Fund: trading at 88 cents on the dollar, with a 6.4% distribution yield
- Western Asset Inflation-Linked Opportunities and Income Fund: trading at 87 cents on the dollar, with a 9% distribution yield
- BlackRock’s 2030 Municipal Term Fund: trading at 87% of net asset value, with a 2.7% income yield
Investors who are willing to take on the risk may find that closed-end bond funds offer a timely and tactical way to capitalize on the dislocation in the bond market.
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