We continue to live in a “Borrower’s Paradise,” Wonderland. That much is obvious with the 3 month Bill at 1.54%, the two year Treasury at 1.53% and the 10 year Treasury at 1.77%.
Touting his bilateral trade deals and financial deregulation, at Davos, President Trump said that “we still have the best economic numbers that we’ve had in so many different areas,” even despite the fact that the Fed has “raised rates too fast and lowered them too slowly.”
For American borrowers, I say, take what advantage that you can, because lower rates will mean more stock buy-backs, more refinancing of both Investment Grade and High Yield debt, lower mortgage rates, lower rates on student loans, and it will be a boon for the REITs, and other holders of commercial property, as you will be able to borrow for less and less and less, if the President gets his way.
This is step-one of a protracted process, in my view. We will eventually get to the point where lower yields will “no longer move the needle” and then, “Watch Out.” However, we are not there yet. We are still in our “Borrower’s Paradise” where those needing money, for any purpose, are standing inside “Heaven’s Gates.”
The back side of Wonderland is that it is becoming increasingly difficult to find yield, anywhere, for investors. This is a decided negative for insurance companies, banks, pension funds, savers and retirees, who depend upon yield, and cash flow payments, for their profits and lifestyles and even their existence. It will be equities “up,” Real Estate prices “up,” other hard assets “up,” initially, as both people and institutions alike are forced into riskier assets, in an attempt to cover their expenses and support their lifestyles. The problem here is that many mistakes will be made and my forty-five years on Wall Street tells me that many people, and institutions, will get burned in the process.
I do point to one of the last segments in the markets that still offers some double-digit yields and that is Closed-End Funds. These securities are complicated and a lot of homework has to be done, to separate the wheat from the chaff, but, in opinion, it is well worth the time, or, perhaps more realistically, I suggest that you find someone that is experienced, in this segment of the markets, and knows what they are doing.
Double digit yields can be found in Closed-End Funds, even now, in the MLP space, in the energy and pipeline space, in some High Yield bond portfolios, in funds dedicated to loans, in some mostly Investment Grade bond portfolios, in some REIT and Real Estate funds, and in some hedged dividend plays. Yes, many Closed-End Funds have leverage but I also point out that the leverage is theirs, and not yours.
I also point out another huge advantage, in this sector, and that is that some of the Closed-End Funds pay monthly dividends. Here you get compounding of interest, the opportunity to have money for your monthly expenses, or to re-invest some of it, and grow your principal value, upon which the dividends are based. While it is certainly true that some dividends can be cut, they can also be increased, and some funds have paid out special year-end dividends. The monthly payments also let you assess your portfolios, and what looks attractive, each month, so that decisions can be made every 30 days, or so, on what will benefit your portfolios the most.
The argument has been made to me, several times, that buying a stock with a 3%, 4% or 5% yield and hoping for appreciation is another way to go. I agree, it is another way. However, I point out that with some of the closed-end funds that you are “starting” with a double digit yield and not hoping to get there through appreciation. I also point out that most equity dividends are paid quarterly while monthly dividend payments can be found in some of the Closed-End Funds. There is nothing wrong with trying for appreciation but there is nothing wrong with getting steady cash flows either, that pay in the double digits. The Closed-End Fund concept is particularly valuable for retirees and pension funds that have monthly obligations. In my opinion, it is not one or the other but both, that can be valuable, depending upon your circumstances. What you need determines what you want!
Let’s compare notes, utilizing the Bloomberg Indexes:
High Yield 4.979%
What is noteworthy, in this data, is not just that Treasury yields are falling. Perhaps, more importantly, is that all of the risk asset classes are compressing, and compressing significantly, to Treasuries. This is definitely causing issues for many people and institutions as yield is nowhere to be found, anywhere.
Think about it, carefully chosen closed-end funds, that pay monthly, and it is possible to find double digit yields. This sector of the markets, in my opinion, is the “last man standing” to achieve any meaningful yields. I point out that if you need yields, and cash flows, that this is the sector to find it and that would be about period, and end of story, and you also get diversified portfolios in the funds which help to minimize any credit risk.
Closed-end funds, in my estimation, are the most overlooked, and least appreciated, sector of the markets presently and another man’s ignorance can be your profit. Money managers continually tout Exchange Traded Funds because the more money that come in, the more money the manager makes. This is not the case in closed-end funds.
For those of you needing yield, and monthly income, I suggest a careful look at this market sector and then you can enjoy the crumpets, at your own tea party, as the money rolls in each month. You see, I have found an exit out of our “Fixed-Income Hell” but whether you wish to open the door, is certainly up to you.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.