Corporate bonds

High income from corporate bonds

As interest rates rise, the value of current bonds declines. Additionally, bonds that have a longer duration lose value faster as rates rise because the lender’s money is tied up in the loan longer as rates rise, notes Michael Fosterinvestment strategist at Opposite perspectives.

But this time, long-term bonds are way oversold; the market sells long-dated bonds in exchange for short-dated bonds because long-dated bonds are more likely to lose value when interest rates fall.

However, in doing so, the market has already priced in the interest rate risk that long-term bonds face, which means that some bonds have been oversold because they offer good yields and relatively low risk.

In such a situation, your best bet is to buy a well-managed corporate bond closed-end fund (CEF) like the Western Asset II High Income Fund (HIX), an 8.6% yield that is well diversified in the bond space, with 270 holdings and an average duration of 6.25 years.

It’s a little long, but remember we’re buying it because it’s buying those longer duration bonds when they’re oversold. It holds 94% of its portfolio in corporate bonds, and these issues offer a good average coupon rate of 7.9%. The fund is also trading at a slight discount to net asset value (or just below the value of the bonds in its portfolio) at the time of this writing.

The real reason we want a CEF like HIX, as opposed to a passive ETF or the high yield benchmark SPDR Bloomberg Barclays High Yield Bond ETF (JNK), comes down to one thing: active management.

HIX exceeds its benchmark

HIX is managed by Western Asset, which has been around since 1971 and has a management team with a keen eye on oversold bonds, which is why they’ve nearly doubled the yield of the high-yield bond index fund since inception. of this fund. (HIX has been around since 1998.)

That’s exactly the kind of eye for value we want in a market like the one we’re facing right now. And best of all, HIX’s 8.6% dividend, which has remained stable throughout the pandemic, provides us with a stable income stream that far exceeds inflation.

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