Investing

Junk Bond Dividend Chase May Have Peaked With Big Fund Premiums (JNK, HYG, HYD, HYV, DHF, PHK, HIX)

We have been talking about dividend bubbles forming for about two weeks as of now.  Can the bubbles continue to inflate?  Sure.  But you better take a look at the 30-Year Treasury auction from Thursday.  It did not go well and the long-bond’s yield had almost risen 40 basis points from trough to peak before the yield went a bit lower in the last 24 hours or so.

We track yield spreads almost daily and the spreads have contracted considerably since the stock market recovery since the dog days of June when the spreads were as high as 720 basis points or so.  S&P’s daily spread monitoring has a one-day look-back and it shows that the best may have been seen now in Junk Bond gains.  S&P’s speculative bond spreads (junk bonds that is) on average rose on Thursday.  This was only by 2 basis points higher to 647 basis points, but this is after seeing the S&P report saying “spread narrows” for the first time since the end of July. S&P even said that the investment-grade (high quality) spreads rose by 5 basis points on average to 202 basis points.

While many of the key ETFs in this group are at highs, the premiums being paid in many closed-end funds are getting well above the normal historic levels.  We have tracked many ETF and closed-end funds to see which are close to their highest prices but we are seeing some give-back today: SPDR Barclays Capital High Yield Bond (NYSEMKT: JNK) is down $0.03 at $39.77 versus a 52-week range of $34.09 to $40.16; iShares iBoxx $ High Yield Corporate Bond ETF (NYSEMKT: HYG) is down 0.1% at $91.44 versus a 52-week range of $77.90 to $92.26; Market Vectors High-Yield Muni ETF (NYSEMKT: HYD) is still up by $0.01 at $32.37 and it has a 52-week range of $28.55 to $32.85.

Here is some color on some of the key closed-end funds we track in the junk bond arena:

BlackRock Corporate High Yield Fund V, Inc. (NYSE: HYV) yields more than 8% after raising its dividend a couple of months ago.  Its price is up $0.05 at $13.32 versus a 52-week range of $10.12 to $13.34. The premium/discount to its Net Asset Value (NAV) according to the Closed-End Fund Association is a 5.3% premium now while it has historically traded at a discount to its NAV.

Dreyfus High Yield Strategies Fund (NYSE: DHF) is perhaps down the most (-2.2%) at $4.37 versus a 52-week range of $3.96 to $4.70. This has been very active today with 1.1 million shares being almost 4-times normal volume after its payout was lower this week than in prior payouts.  The new adjusted dividend would be 9.6%. The premium/discount according to the Closed-End Fund Association is a whopping 14.6% and that higher than its average seen all year and compared to past metrics.

PIMCO High Income Fund (NYSE: PHK) is down 0.8% at $13.82 and its 52-week range is $10.52 to $14.00. This yields about 10.5% but it is also at a big premium. The premium/discount according to the Closed-End Fund Association is in the stratosphere at a 74.7% premium.  This always has a mega-premium, but the year-to-date average premium was listed as closer to 52%.

Western Asset High Income Fund II Inc. (NYSE: HIX) is down 1 cent at $10.34 and the 52-week range is $8.77 to $10.47. The latest dividend here is about 9.5%. The premium/discount according to the Closed-End Fund Association is 15.7% and that is much higher than its year-to-date and past premiums.  The year-to-date the average premium has been 10.1%.

Junk bonds often follow equities more than they follow the price of Treasury bonds.  That being said, you have seen price appreciation rise and rise in junk bonds.  You have also seen the corporate bond spreads in ‘junk’ go from about 720 basis points at the peak down to about 645 basis points this week.  That is significant price appreciation from the spread contracting as yields and prices move inversely.  And now you have the closed-end funds trading at much higher premiums than what investors have been used to.

So, has the great dividend chase finally come to an end?  You will never know until time passes, but chasing these at this level looks very late in the dividend chasing game if you have tracked this arena for very long.

JON C. OGG