Saturday, January 28, 2023

Bargain CEF Offering 8% Yield


Something shocking just happened: Treasury Secretary Steven Mnuchin cut off a $454-billion program the Federal Reserve uses to keep the bond market running.

A disaster, right?

You’d think so. After all, we’ve heard time and time again that the Fed will do whatever it takes to support the bond market through the crisis. Now a big source of cash needed to do that is gone.

The bond market’s response was even more surprising: crickets.

The junk bond–tracking SPDR® Bloomberg Barclays High Yield Bond ETF (NYSE:) and iShares National Muni Bond ETF (NYSE:) held on to post-election gains after Mnuchin’s decision was announced.

No Fed Guarantee—and No Drop?

JNK-MUB Price Chart

JNK-MUB Price Chart

If you think this is an opportunity to sell, I’d ask you to reconsider. While markets get things wrong all the time, in this instance they’re right not to worry; the programs that guaranteed debts went almost entirely untouched. A $750-billion program for this purpose, for instance, has used just $13.5 billion, mostly because just the knowledge the program was there kept panic selling at bay.

Today, investors understand that these programs were barely needed, even in the spring lockdown. And since we’re unlikely to see a national lockdown in this second wave of COVID-19, these programs aren’t as necessary as you’d think. Even in the unlikely event we do see a lockdown, it’s fairly safe to assume that since the programs weren’t needed last time, they won’t be needed this time.

But that hasn’t stopped some spooked investors from jumping the gun. That, in turn, has set up some bargains for us in closed-end funds (CEFs).

The Big Yield Steal

Consider, for example, the Western Asset High Income Opportunity Closed Fund (NYSE:).

Right now, HIO trades at a 9.6% discount to NAV, more than its long-term average discount of 7.2%, partly due to overreaction to the Mnuchin headline. What’s more, HIO has crushed corporate-bond index funds like JNK since its IPO.

Bond CEF Easily Beats the Index

JNK-HIO Total Returns

JNK-HIO Total Returns

And, finally, HIO is an income machine, offering a 7.9% yield, thanks to its diversified high-yield bond portfolio and large discount. As you can see above, HIO holders have doubled their investment in a decade. If you buy today, you’ve got an excellent shot at doing the same.

Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, “7 Great Dividend Growth Stocks for a Secure Retirement.”

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