Whether you are a senior, a retiree, a pension fund, a university endowment, or a whole host of other businesses that needs yield, and a cash flow, you are in the line of fire. With the 5 year and 10 year Treasuries hitting a record low yield last week, bond investors are in a wrath of hurt. I am of the opinion that this won’t change anytime soon, as the Fed is supporting low yields to keep the borrowing costs of the country down, as the coronavirus pandemic shows no sign of abetting. In my view, we are in a cycle that will last years, where very low interest rates will be the norm.
Our current economy is a “Borrower’s Paradise,” and conversely a “Hell,” for fixed-income investors. This is also having a marked effect on banks, insurance companies and other regulated financial enterprises. They, too, are feeling the pain.
Make no mistake about the Fed. They are “all in” as they now massively influence, if not dominate and control, the fixed-income markets. They have left their normal patterns and are now buying corporate bonds, municipal bonds and there is virtually no segment of the bond markets that they have not entered to keep all yields incredibly low, and not just Treasury yields.
There’s no monthly cap, no weekly cap… that language is open ended, and it’s meant to send a signal to the market that we’re not going to be bound by, for example, $60 billion a month or anything like that. We’re going to go in strong…
– Fed Chairman, Jerome Powell
As examples of this, using the Bloomberg Indexes, Treasuries now yield 0.456%, U.S. Corporates now yield 1.901% and Municipals yield 1.271%. Talk about “Nowhere to run and nowhere to hide,” and you have found it. There is just no yield almost anywhere in sight and so I postulate that one of the reasons for the stock market’s recent performance is that typical bond money, who can no longer afford fixed-income investments, are heading into equities as a last ditch effort to make money on appreciation, as our current yields can no longer support a number of businesses or lifestyles.
The danger here is that any kind of significant reversal in the equity markets will cause an outsized reaction, in my estimation. This is because there will be panic in the streets, as the typical bond investor’s money evaporates with any downturn. We, in my opinion, are in a somewhat elevated risk position and I point this out today for your consideration.
The only sector left, in my view, where any sort of real yield is left are closed-end funds. They are, in my estimation, the most overlooked part of the fixed-income markets. Here, it is still possible to find double digit yields and monthly payments which, of course, add to the yield if you are reinvesting the dividends and you are achieving compounding of interest.
These funds also give you the opportunity to use some, or all of the monthly payments, if needed, without having to sell anything which can be a decided positive in our volatile markets. You have to know what you are doing here and there are many factors to be considered but it is worth the time, in my estimation.
Much is made of the Net Asset Value (NAV) in these funds, but I think when you can purchase assets at less that their value, the discount to NAV, that there is additional value in these funds. I would avoid purchasing any of the closed-end funds at a meaningful premium to the NAV as this can come back to haunt you, regardless of the yield. This sector of the markets has approximately 500 different funds so there is a lot to choose from, in terms of their underlying assets.
You have choices in the energy sector, high yield bonds, investment grade bonds, convertible bonds, real estate, loans, and the list goes on. If you get some appreciation, fine, but the real reason to buy closed-end funds, in my view, are the monthly dividends and the yields. This methodology is not for everyone but it certainly a boost for those needing current income.
We have lowered interest rates to near zero in order to bring down borrowing costs. We have also committed to keeping rates at this low level until we are confident that the economy has weathered the storm.
– Fed Chairman, Jerome Powell
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.