I've looked at bond inventories (bonds for sale by various firms all along the street) on, more or less, a daily basis for the past 20 years. It's a habit. It doesn't necessarily mean I'm going to buy something. The main purpose of the exercise is to get a feel for the bond market that goes beyond looking at where Treasury bond yields are for that particular day. I see what investors are willing to pay for bonds based on multiple factors, the most important being yield and safety.
In recent years, it seems that most investors have been more concerned with quality and capital preservation than yield. That's no surprise in light of the volatility financial markets have experienced since the Financial Crisis of 2008. Accommodative Federal Reserve policy and investor fear have kept rates at historical lows for nearly a decade.
But now that's changing -- albeit slowly.
The unexpected election of Donald Trump, while inspiring a tangible rally in stocks, has sparked an upward movement in bond yields (prices go down) due to anticipated inflationary pressure from possible infrastructure spending and tighter foreign trade policy. The Federal Reserve gradually shifting away from its zero-rate federal funds policy is also a contributing factor.
As the Fed shifts from an accommodative policy, the result will be the shrinking of its balance sheet, meaning the central bank will be selling instead of buying bonds. Expect this to put gradual pressure on bond yields and prices.
So where do investors go for bond-style performance (to bring balance to a portfolio) and decent income? Lately, I've been on a bit of a closed end fund (CEF) kick. There's value to be found in the CEF space and the yields are magnificent. Here are three ideas that are a better choice right now than bonds.
1. CBRE Clarion Global Real Estate Income Fund (NYSE: IGR)
A long-time staple of Street Authority's Daily Paycheck real-money portfolio, IGR throws off an impressive 7.9% yield while trading at an 11.4% discount to its net asset value (NAV). Real estate has long been a decent bond proxy. It lays there and produces steady income with a lower correlation to traditional equities. Publicly-traded Real Estate Investment Trusts (REITs) are a great way for individual investors to gain exposure to real estate as an asset class without the hassle of being a landlord.
2. Calamos Convertible Opportunities and Income Fund (Nasdaq: CHI)
I profiled this fund earlier this year and still recommend using it. The fund manager, one of the best at managing this asset class, focuses on convertible bonds which, in addition to paying interest, track with the issuer's underlying common stock performance, providing a lower correlation to traditional fixed income markets. This is important as volatility in regular bonds will increase as rates rise. CHI's portfolio contains some of the best biotech and InfoTech names out there, giving investors exposure to high-growth sectors with an income component. Fund shares trade at a slight 0.63% discount to NAV and pay a hefty 10.3% yield.
3. Voya Global Equity Dividend and Premium Opportunity Fund (NYSE: IGD)
While owning high quality, dividend-paying stocks with strong global franchises such as Apple (Nasdaq: AAPL), Pfizer (NYSE: PFE), and Citigroup (NYSE: C), the fund manager enhances yield by using the relatively simple options strategy of selling covered calls. The fund trades at an attractive 9.1% discount to NAV and offers a solid 9.86% dividend yield.
Risks To Consider: My biggest concern is that most of these funds are trading at or near their 52-week highs. However, while that could seem expensive, the more consistent thread is that all of the funds trade at a 7% discount to their NAV on average. This indicates that, at least internally, there is some inherent value to be had. Portfolio diversification within each fund as well as the different complexion of each provides further insulation.
Action To Take: These three funds produce an average yield of 9.35%, 297% more than the current yield on the 10-year Treasury. As the bond market slowly enters choppier waters, this combination should offer price upside while providing a lower correlation to traditional bonds.
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