The sharp selloff in the credit markets during the year’s first half has created some attractive opportunities.
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Trickle-down economics lives on for individual investors trying to garner interest income. While the Fed has increased its key federal-funds rate to 2.25%-2.50% from basically nil earlier this year, “high yield” bank savings accounts have boosted their rates by only a third to half as much, to less than 2%—far below what short-term Treasury bills pay. “High yield” is to these accounts what “lite” is to beer, something that’s satisfying only when there’s nothing else to slake your thirst.
Bonds also come up rather light on income after their yields’ sharp drop in recent weeks. The benchmark 10-year Treasury note’s yield was down more than 80 basis points from its mid-June peak to 2.67% on Thursday, while the yield on the two-year Treasury—the maturity most sensitive to expected Fed rate changes—slid 56 basis points over that span, to 2.87%. (A basis point is 1/100th of a percentage point.)
Both yields are vastly below the 9.1% rise in consumer prices over the most recent 12 months, so in real terms they are well below zero. Given the extremely optimistic future inflation expectations embedded in those yields, Treasury inflation-protected securities, or TIPS, offer a better value, as our colleague Andrew Bary reported last week.
Farther out on the risk spectrum, the sharp selloff in the credit markets during the year’s first half has created some attractive opportunities. In a CNBC interview this past week, DoubleLine CEO Jeffrey Gundlach highlighted the relatively higher-quality portions of the speculative-grade credit sectors that had already been marked down by double digits. Without naming names, he gave thumbs-up to double-B and single-B bonds, near the top end of the high-yield sector, and to the upper tranches of collateralized loan obligations, or CLOs, derivatives that slice and dice corporate loans.
Those are mainly institutional sectors of the credit market not readily accessible to most individual investors. But an accessible array of closed-end and other exchange-traded funds also invest in these instruments, albeit with widely varying results.
Mark Grant, the chief global strategist at Collier Securities, pores over scores of such funds every week in search of those that pay double-digit annual yields each month. His core focus is to provide retirees with income that more than keeps pace with inflation, for basic living expenses or for niceties such as going out to dinner or on vacation. Alternatively, if investors reinvest those monthly payouts, the money should compound at a rapid clip.
To be sure, most of his picks have suffered sharp, double-digit negative total returns this year in the steep selloffs that hit all equity and credit sectors. But most have experienced nice rebounds in the past month or so, along with stocks and the high-yield bond market. And they have maintained their payouts—an important criterion for Grant’s picks—with only minor changes.
Within the fixed-income sectors, Grant likes Oxford Lane Capital (ticker: OXLC), Eagle Point Credit
(ECC), and XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT). These derive their high incomes from CLOs, which came under pressure earlier this year.
Among closed-end funds in more conventional leveraged-loan and high-yield bond sectors, Mark likes Abrdn Income Credit Strategies (ACP), Eaton Vance Limited Duration Income (EVV), and the Pimco Income Strategy Fund II
(PFN). He also favors some convertible closed-ends, including Virtus Convertible & Income (NCV) and its corporate cousin, the Virtus Convertible & Income Fund II (NCZ), as well as Advent Convertible & Income
(AVK), previously featured in Barron’s. And for those willing to venture into emerging market bonds, there’s Virtus Global Multi-Sector Income
(VGI).
These are among the fixed-income and covered-call CEFs that Grant likes and that offer monthly payouts that stay ahead of inflation. Best of all: Unlike some other investments, they actually deserve the “high yield” label.
Write to Randall W. Forsyth at [email protected]
