When to buy a bond fund

[marko]

This should be a pretty straight forward question.

I'm interested in making a very small buy into a high yield bond fund (Pimco PTY).

With Fed hiking interest rates I'm just wondering if the hike is already reflected in the current price or is there some day/event that will trigger a drop in price? Is there some point where the Fed's hike becomes effective and perhaps make it a better buy?

 

[Freedom56]

PTY is a CEF that is leveraged 44%. The short answer is buy leveraged CEFs when they are selling about 10-14% below asset value. When the Fed starts raising interest rates, these funds sell off and start recovering about 1-2 months before the last rate hike.

 

[COcheesehead]

It closed today at $14.86. It’s NAV is 12.91 for a 14% ish premium. PDO with a similar 8% + yield on the other hand is at a 6% discount.
PDI with an 11% dividend was recently trading below its NAV, but if you blinked you missed it. Closed end bond like funds are notoriously volatile. Just understand what you are buying. They are not bonds.

 

[marko]

Thanks to both of you. Despite this post in trying to buy low, my real interest is in trying to get a decent yield out of either PTY, PDO or PDI.

Their historic price seems to bounce around but for someone who intends to hold on for several years and take the dividends my mind is that it should be ok. Plus, as noted it's a small stake.

 

[COcheesehead]

The market price and the fund’s NAV are published every trading day so you can follow them and see whether they have a premium or a discount. It would be nice to get them at a discount, but sometimes they have a premium for a good reason.

You need a strong stomach to use bond like CEFs. I follow them. Some were down as much as 60% in 2020. Think about that. If that doesn’t bother you, buy. In some respects they are classic yield chasing traps. In other cases they provide a steady income if you don’t mind losing total value in your portfolio.

 

[marko]

The market price and the fund’s NAV are published every trading day so you can follow them and see whether they have a premium or a discount. It would be nice to get them at a discount, but sometimes they have a premium for a good reason.

You need a strong stomach to use bond like CEFs. I follow them. Some were down as much as 60% in 2020. Think about that. If that doesn’t bother you, buy. In some respects they are classic yield chasing traps. In other cases they provide a steady income if you don’t mind losing total value in your portfolio.

Thanks. This is very helpful insight. Appreciate it.

 

[Lsbcal]

I never have owned a high yield bond fund of any flavor.

FWIW, I would look at a combo of equity + a bond fund that has matched the returns of your targeted high yield fund. I would download the historical data from the Yahoo site to do the compare.

I have looked at the last 2 Fed high periods in 2004-2006 and 2015-2018. One bond fund that beat the others was VFIDX, intermediate term investment grade.

 

[marko]

I never have owned a high yield bond fund of any flavor.

FWIW, I would look at a combo of equity + a bond fund that has matched the returns of your targeted high yield fund. I would download the historical data from the Yahoo site to do the compare.

I have looked at the last 2 Fed high periods in 2004-2006 and 2015-2018. One bond fund that beat the others was VFIDX, intermediate term investment grade.

Thanks. I have had a very hefty stake in TRPrice's RPSIX for over 20 years which is a combo bond and equity (fund of funds) fund.

Over the past few years, the dividend has dwindled and the price hasn't improved so I decided to look for greener pastures.

 

[Lsbcal]

As I understand high yield bonds they are bonds with some equity like characteristics. One has to determine if the bonds will be in default risk or credit downgrade risk. One hopes that the fund has enough diversification to reduce these risks which go up as we approach recessions.

FWIW, I personally prefer to separate the risks and have only relatively safe bonds funds while taking the risks on the equity side.

But I suspect you know this already and maybe have an alternate view Marko.

 

[marko]

As I understand high yield bonds they are bonds with some equity like characteristics. One has to determine if the bonds will be in default risk or credit downgrade risk. One hopes that the fund has enough diversification to reduce these risks which go up as we approach recessions.

FWIW, I personally prefer to separate the risks and have only relatively safe bonds funds while taking the risks on the equity side.

But I suspect you know this already and maybe have an alternate view Marko.

No alternate view but AFAIK high yield bonds, aka junk bonds have no "equity-like characteristics", they're just bonds with a higher risk--and higher yield. Having them within a bond fund does mitigate a lot of the risk however.

 

[Lsbcal]

No alternate view but AFAIK high yield bonds, aka junk bonds have no "equity-like characteristics", they're just bonds with a higher risk--and higher yield. Having them within a bond fund does mitigate a lot of the risk however.

If you look at the performance of PTY versus the SP500 during the severe drop in 2020, they look quite similar. Other bond funds were much less volatile. Just an observation as I don't follow PTY.

 

[marko]

If you look at the performance of PTY versus the SP500 during the severe drop in 2020, they look quite similar. Other bond funds were much less volatile. Just an observation as I don't follow PTY.

Yes, I'm aware of that. Thanks. As it is a CEF, I'm looking for income not ballast. PTY's dividends remained rock-solid during 2020 as well as during 2008/09.

 

[Freedom56]

You need a strong stomach to use bond like CEFs. I follow them. Some were down as much as 60% in 2020. Think about that. If that doesn’t bother you, buy. In some respects they are classic yield chasing traps. In other cases they provide a steady income if you don’t mind losing total value in your portfolio.

When they drop by 60%, that is precisely the time to buy these CEFs. Many individual fixed income issues also dropped by 60% in 2020 but like CEFs recovered very quickly. Those funds and investors that sold in 2020 were busy buying them back at much higher prices in 2021. This year will be a lot like 2013 if the Fed continues to raise rates which they plan to do. Many investors will be in tax loss selling mode towards the end of the year which will compound the sell-off so late November into December is likely going to be a good time to buy. Low coupon investment grade bonds will suffer the most. High yield should outperform investment grade in this environment as the economy is strong and credit risk is a lesser concern.

 

[COcheesehead]

When they drop by 60%, that is precisely the time to buy these CEFs. Many individual fixed income issues also dropped by 60% in 2020 but like CEFs recovered very quickly. Those funds and investors that sold in 2020 were busy buying them back at much higher prices in 2021. This year will be a lot like 2013 if the Fed continues to raise rates which they plan to do. Many investors will be in tax loss selling mode towards the end of the year which will compound the sell-off so late November into December is likely going to be a good time to buy. Low coupon investment grade bonds will suffer the most. High yield should outperform investment grade in this environment as the economy is strong and credit risk is a lesser concern.

You and I know that, but on other forums I post on people thinking they bought a low volatility bond fund freaked out. These aren’t bonds. They are sophisticated, leveraged, hedged investments for income mostly.

 

[Freedom56]

You and I know that, but on other forums I post on people thinking they bought a low volatility bond fund freaked out. These aren’t bonds. They are sophisticated, leveraged, hedged investments for income mostly.

Many CEFs have zero leverage also and with active management, are much better than passive bond funds that are slowly being crushed. Right now if your investment grade bond fund is not yielding at least 4.5-5%, you are going to enter the "house of pain" as Jim Cramer puts it.

 

[COcheesehead]

Many CEFs have zero leverage also and with active management, are much better than passive bond funds that are slowly being crushed. Right now if your investment grade bond fund is not yielding at least 4.5-5%, you are going to enter the "house of pain" as Jim Cramer puts it.

I actually don’t use any bond funds. I run a muni bond ladder with about 140 individual bonds. I am getting about 4% tax free and that yield is going up as I reinvest maturing bonds. I have a boatload maturing in June.

 

[moontower]

Equity Fund - 7%

I like JEPI at JP Morgan, pays 7% with NO leverage, its an equity fund, great in sideways or bear because CCs goose the divy, and in pure bull holds its own....also EOI has beaten the SPY over last decade between divy and principal increase.

JEPI EOI PDI

and for tax free in CA, cant beat PCQ muni fund

 

[olyveoil]

The market price and the fund’s NAV are published every trading day so you can follow them and see whether they have a premium or a discount. It would be nice to get them at a discount, but sometimes they have a premium for a good reason.

You need a strong stomach to use bond like CEFs. I follow them. Some were down as much as 60% in 2020. Think about that. If that doesn’t bother you, buy. In some respects they are classic yield chasing traps. In other cases they provide a steady income if you don’t mind losing total value in your portfolio.

I bought PDT and PDI in 2020 and 2021. Income is steady. NAV is about the same.

 

[Freedom56]

I bought PDT and PDI in 2020 and 2021. Income is steady. NAV is about the same.

PDT is a well managed CEF. Over the past 20 years it has outperformed the S&P 500. I have traded that one many times after major sell-offs.

 

[COcheesehead]

I bought PDT and PDI in 2020 and 2021. Income is steady. NAV is about the same.

PDI in 2020 hit a low around 16.20 from a high of just over 33. Now two years later it’s back to about 23.70. Which is fine if you are just pulling income and don’t care about loss of capital. If you had to sell along that journey, another story.

 

[RobLJ]

I've been happy with PDI, with a 30% return over two years. In January (or last November) it was at an absurd premium to NAV at around 25% or more, so I would never buy it at that. The premium now is relatively sane. You are buying to some extent a black box, due to the use of options/hedges in the fund, but PIMCO longterm has been pretty successful at supporting the 10% yield. It is about a third non-agency mortgage. Like most leveraged bond CEFs it has taken a pasting recently.

Here's a recent article in Seeking Alpha, for what it is worth (not much).
https://seekingalpha.com/article/4497124-pdi-stomaching-short-term-pain-for-long-term-gain

It closed today at $14.86. It’s NAV is 12.91 for a 14% ish premium. PDO with a similar 8% + yield on the other hand is at a 6% discount.
PDI with an 11% dividend was recently trading below its NAV, but if you blinked you missed it. Closed end bond like funds are notoriously volatile. Just understand what you are buying. They are not bonds.