Economics remains alive for individual investors trying to collect interest income. While the Fed raised its benchmark federal funds rate to 2.25%-2.50% from essentially zero earlier this year, the bank’s “high-yield” savings accounts only increased their rates by a third to a half, to less than 2%— well below what short-term Treasuries pay. “High performance” is to these accounts what “lite” is to beer, which only satisfies when there’s nothing else to quench your thirst.
Bonds also appear relatively light on earnings after their yields have fallen sharply in recent weeks. The yield on the benchmark 10-year note fell more than 80 basis points from its peak in mid-June to 2.67% on Thursday, while the yield on the two-year note – the maturity most sensitive to expected Fed rate changes – fell by 56 basis points over that period, to 2.87%. (A base unit is 1/100th of a percentage unit.)
Both yields are well below the 9.1% rise in consumer prices over the past 12 months, so in real terms they are well below zero. Given the extremely optimistic future inflation expectations embedded in these yields, Treasury Inflation-Protected Securities, or TIPS, offer better value, as our colleague Andrew Bary reported last week.
Further outside the risk spectrum, the sharp selloff in credit markets in the first half of the year created some attractive opportunities. In an interview with CNBC last week, DoubleLine CEO Jeffrey Gundlach highlighted the relatively higher-quality parts of the commercial-grade credit sectors that were already down by double digits. Without naming names, he objected to double-B and single-B bonds, near the top of the high-yield industry, and the senior tranches of collateralized loan obligations, or CLOs, derivatives that slice and dice corporate loans.
These are mainly institutional sectors of the credit market that are not easily accessible to most individual investors. However, an accessible range of closed-end funds and other exchange-traded funds also invest in these instruments, albeit with very different results.
Mark Grant, the chief global strategist at Collier Securities, looks at several such funds each week in search of those paying double-digit annualized returns each month. Its main focus is to provide retirees with income that does not keep pace with inflation, for basic living expenses or for nice things like going out for dinner or vacations. Alternatively, if investors reinvest these monthly payments, the money will grow at a rapid rate.
To be sure, most of his picks have suffered sharp, double-digit negative total returns this year in the steep sell-offs that have hit all the equity and credit sectors. But most have seen a nice rebound in the past month or so, along with stocks and the high-yield bond market. And they have maintained their payments – an important criterion for Grant selections – with only minor changes.
In the fixed income sectors, Grant likes it
Oxford Lane Capital
Eagle Point Credit
XAI Octagon Floating Rate & Alternative Income Exchange
(XFLT). These derive their high income 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
Eaton Vance Limited Duration Income
(EVV), and the
Pimco II Income Strategy Fund
(PFN). It also favors some closed convertibles, among them
Virtus Convertible & Income
(NCV) and its corporate cousin, the
Virtus Convertible & Income Fund II
(NCZ), as well as
Advent Convertible & Income
(AVK), which previously appeared on Barron’s. And for those looking to get involved in emerging market bonds, there is
Virtus Global Diversified Income
These are among the fixed income and covered call CEFs that Grant likes, and they offer monthly payouts that stay ahead of inflation. Best of all: Unlike some other investments, they actually deserve the “high performance” label.
Write to Randall W. Forsyth at email@example.com