Corporate bonds are currently offering some of the best yields seen in years, with well-run closed-end funds (CEFs) providing opportunities to tap into these high yields at a discount. Business Insider, known for its bearish predictions, has even acknowledged the favorable bond market conditions, stating that corporate bonds are currently among the safest they have been in years. This has resulted in record inflows into US corporate bond funds, as investors shift to more risky products such as corporate bond funds.
Some of the top performing corporate bond-focused CEFs are currently offering yields above 9%, with strong coverage by their investments. Despite the recent rise in bond yields, default rates remain relatively low, with private credit at a 0.3% default rate and investment-grade corporate bonds around 0.5%. This favorable environment has allowed skilled bond-fund managers to produce high-yielding portfolios with relative ease.
One example of a successful bond-focused CEF is PTY, which has outperformed the S&P 500 and maintained generous payouts even during periods of low interest rates. The fund’s ability to select winning investments and avoid losers has allowed it to achieve a rich 9.6% yield. While PTY has been able to implement an aggressive trading strategy to achieve its impressive returns, other bond funds with more conservative mandates, such as DHY and EVV, have also outperformed the broader corporate bond index by focusing on avoiding defaults.
Despite their long-term success, funds like DHY and EVV are currently trading at discounts, making their high yields even more attractive. These discounts make their payouts more sustainable, with DHY needing to earn just 8.5% on a NAV basis to maintain its 9.2% payout, and EVV’s 9.8% yield becoming 9% due to its discount. As bond yields are expected to fall in the future, lower rates may boost the portfolio values of DHY and EVV, potentially leading to premiums similar to those enjoyed by PTY.
Investors looking to capitalize on these high yields and potential premiums should consider investing in bond-focused CEFs like DHY and EVV, which offer sustainable payouts at discounted prices. By locking in today’s high yields and taking advantage of these discounts, investors may be able to benefit from future price increases as bond yields continue to rise. This presents a unique opportunity for investors to access corporate bond yields at a discount and potentially earn steady returns in the current market environment.
