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EnigmaDude (97.62)

High Yield Bond Funds

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January 07, 2009 – Comments (5) | RELATED TICKERS: JNK , CYE , HIO

It seems like a severe lack of infomative and entertaining blogs has created a drought of sorts on CAPS lately.  So here is one to stimulate those of you who actually have useful comments and insights to share! 

Can anyone give me some suggestions or opinions regarding high yielding, closed-end bond funds?  I have come across several that look very intriguing (i.e. good value) and have recently read some interesting articles in Smart Money and other places that talk about what a great time it is to invest in corporate bonds, preferred shares, etc.

I am thinking about investing some real money in 1 or 2 of those ETFs unless someone can give me some strong advice why I should avoid them.  Any takers?

5 Comments – Post Your Own

#1) On January 07, 2009 at 2:51 PM, EggplantWizard (99.78) wrote:

I think it's a great idea, in general, though I worry how large of an impact the Satyam situation is going to have on the market. I bought CYE in late December and sold it today, I will look to rebuy when I'm confident that either there's no systemic harm that will be caused by the Satyam sitiuation, or when the panic is near peak.

High yield bond funds look like one of the most attractive options in general.

http://caps.fool.com/blogs/viewpost.aspx?bpid=127121&t=01000407271498798818&source=iomsitcag0000001#comment127136

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#2) On January 07, 2009 at 3:06 PM, motleyanimal (99.23) wrote:

The site I start with is: http://www.cefa.com/

From there I go to the fund site and read the annual reports and 10Ks and examine the portfolio.

There are so many closed end funds selling at huge discounts to NAV. But you will need to weed them out.

Some have expense/management fees that are way too high, forget about anything over 2%. You also need to be careful with the leveraged funds as many have problems with ARPS (Auction Rate Preferred Shares) since that market has nearly dried up. Many funds are redeeming those shares, meaning that they are deleveraging because of regulations that require closed-end funds maintain an asset coverage ratio of at least 200% with respect to preferred stock. Others have cancelled or cut dividends for this reason.

Of your 3 picks, HIO would be a consideration for me, CYE is not, and JNK is an ETF that is index based, has a low expense fee, but is trading at a premium to NAV of about 10%, so I would wait for a better price.

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#3) On January 07, 2009 at 3:18 PM, EnigmaDude (97.62) wrote:

thanks for the comments. 

motley - The web site is a great resource! I'll have to spend some time studying it. I am leaning toward HIO but would prefer to get it at more of a discount to NAV.

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#4) On January 07, 2009 at 3:43 PM, motleyanimal (99.23) wrote:

I should also mention that investment grade bonds and municipals offer great values with much less risk. I've actually done better with municipal closed end funds than other sectors. I track them and trade them and don't hesitate to take a 5% gain. Another caveat, avoid the funds that have light trading volume and have market makers who post a wide spread.

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#5) On January 12, 2009 at 4:23 PM, loj04 (75.63) wrote:

I've been thinking the same thing, and it makes logical sense too. In a credit contraction/deflationary environment, bonds are the thing to buy. In addition, the government seems unwilling to let many companies fail, IE too big to fail. About 1/4 of my money is in LQD and 1/8 in HYG.

High yield bond funds aren't composed of the "too big to fail", which I think makes them much more dangerous.

If you have the risk tolerance, you might want to consider PGF. It is a preferred financial shares ETF that's yielding ~12%. Most of the preferred shares I think fall under too big too fail. I figure PGF is a way to get some of my TARP money back. For this, I really like ETFs. They usually can have VERY low expenses.

CYE is leveraged, and in deflationary enviroment, generally leverage is bad.

I'm not sure about HIO. They have a lot of holdings, but a lot of those are companies I don't think are gonna make it...GMAC, GM, Ford, Blockbuster. Stil, it seems like they're only a small part of the fund as to not effect it too substancially...

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