Bonds are finally an intriguing place for retirement income, suggests Brett Owens, closed-end fund specialist and editor of Contrarian Outlook.
If we are at a point where, perhaps, Fed chair Powell doesn’t have as much work to do as before, that could be an inflection point for short-term bond rates — and an inflection point for shorter-maturity bond funds. In other words, the window might be closing on our chance to buy low.
Fortunately, we can make the most of that opportunity by buying not bond mutual funds or bond ETFs, but bond closed-end funds (CEFs). That’s because, in addition to buying while short-term bonds are against the ropes, many of these CEFs are also trading for below their net asset value.
The PGIM Short Duration High Yield Opportunities Fund (SDHY) is a relatively new fund with inception in November 2020, so most of its short life has been spent weebling and wobbling.
SDHY invests primarily in below-investment-grade fixed income, and it will typically maintain a weighted average portfolio duration of three years or less and a weighted average maturity of five years or less — the latter is considerably shorter than its target right now, at 2.9 years.
The short maturity helps tamp down on volatility, but SDHY is hardly your average short-term bond fund, including quite a bit more movement.
SDHY packs a mean yield punch in part because of its low credit quality. Just 11% of its portfolio is investment-grade; another 34% is in BB debt (the top tier of junk), and another 35% is in B-graded bonds.
Also helping is a decent amount of debt leverage — 17% at last check, which isn’t exceptionally high, but still a fair amount of extra juice to performance and yield.
That juice works both ways, hampering SDHY’s performance during a bear climate for bonds. But clearly, given its performance of late, it has significant potential once the Fed starts slowing its hike pace (and especially once it actually throttles back rates).
Also alluring is a nearly 10% discount to NAV, implying that you’re buying SDHY’s bonds for 90 cents on the dollar. Granted, that’s not much more than its historical discount since inception of 10.3%, but it’s still a bargain no matter which way you slice it.