Interest Rates Have Stabilized: Why Aren’t Discounts Narrowing?
Written by Michael Fabian, July 24th, 2013
From the non-farm payroll report announcement on July 5, until now, interest rates have stabilized and even steadily declined. Credit heavy indexes such as the iShares High Yield Corporate Bond Fund (HYG) and the PowerShares Senior Loan Portfolio (BKLN) have retraced much of the decline we witnessed in the months following the Fed’s now infamous tapering comments. This can largely be attributed to the strength in the equity market, subsequent dovish remarks by Bernanke, and institutions quickly jumping back in to high-yield bonds as spreads widened, and dislocations began to present themselves.
Many large, popular fixed-income CEFs endured declines of 10-15% or more during this period, and swung to considerable discounts not seen in years. Although market prices are off their lows due to the recovery in NAV, we have yet to see the typical discount narrowing most bottom feeders would have hoped for by now.
For clients in our CEF strategy, when I start buying into the fray, when prices are at their most desperate point, I expect to get paid back in two different ways. First, on the recovery of the assets within the fund’s portfolio, which to a large extent is currently under way. But secondarily, I want to see discounts narrow or swing to premiums as compensation. Especially, in light of the risk we took in making purchases while in the midst of a correction, and then white knuckling it through the ensuing volatility. Unfortunately at this point, we have yet to see number two come to pass, and on this go around I think it might take some additional time.
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