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I'm not a pack rat, but I
saved the October 6, 2008, issue of The New Yorker
magazine.
Only weeks earlier, the investment bank Lehman Brothers had
failed and the markets were spiraling downward. As always,
the magazine had its signature cartoons that perfectly
captured the times. In this issue there were a number that
summed up the dour sentiment of investors.
In one cartoon, a man walks into his bedroom to discover his
wife cheating on him. The caption reads: "Not on the
mattress where we keep all our money!"
 During
the market downturn, one enterprising company even released
a product called "The
Mattress Wallet." Fashioned like a miniature mattress,
the wallet was marketed with tongue-and-cheek campaigns,
designed to connect with concerned investors. In one ad, the
"M.R.O.R" (mattress rate of return) of 0% was shown to be
superior to the market's double-digit decline.
As the market continued to slide, investors' money piled up
on the sidelines. And when the government announced it would
temporarily guarantee money market funds, the cash rolled
in. True, the yield on money market funds had fallen to less
than 1% by December 2008 -- only marginally better than a
mattress.
But the trend to "take to the mattresses" began to slowly
unwind over the course of the market's subsequent rally. The
mattresses -- and the money market accounts -- have been
raided to fund better-yielding investments.
In March 2010, U.S. investors withdrew $148.2 billion from
money market accounts -- much of it making its way into the
bond market.
The investment research company Morningstar reported that
75% of the inflows into mutual funds in March went into bond
funds. High-yield bond sales in the first quarter of 2010
were $61 billion -- the highest since 1980, when the sales
were first tracked.
While this has been great news for existing bond holders,
new investors are having a tougher time finding good bond
yields at a reasonable price. This is especially true in the
universe of closed-end bond funds. Only a few months ago,
investors could buy into a closed-end bond fund for less
than the
net asset value (NAV) of its portfolio. Now that the
"mattress rally" is in full swing, those bargains are far
fewer today.
In fact, a number of closed-end bond funds are trading at
premiums. Buying a fund at a premium isn't always a bad
thing. Some funds normally trade at a premium. And for that
matter, some funds normally trade at a discount. But we're
starting to see the prices of many closed-end funds trade
above their historic range -- at narrower discounts or
higher premiums -- than they have during the past few years.
As an example, I've graphed the price premium/discount for
the Western Asset High Income Fund (NYSE: HIF) over
the last five years.
 This
recent trend of rising premiums introduces a little more
price risk for closed-end bond funds. And it's something we
need to be aware of. For instance, should these premiums
start to erode back toward their normal range -- as they
could if interest rates rise -- share prices could drop.
One of the things I always check when I'm researching a
closed-end fund for my
Daily Paycheck newsletter is its historic
premium/discount range. I highly recommend
CEFConnect as a source for this data. It is a free website that's easy to use.
I can say that there's one good thing from the market's
recent swoon: some of the premiums are beginning to close.
While there are still a number of funds trading above their
net asset value, I am keeping my eyes open for
opportunities.
Always searching for your
next paycheck,
Amy Calistri
Chief Investment Strategist --
The Daily Paycheck
P.S. -- If you're interested in learning more about
The Daily Paycheck, please
visit this link. I'd love for you to join me as I
continue building my portfolio! |
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