Updated: March 22, 2017
As recently as last week, many high quality closed-end funds (CEFs) were being neglected thanks to the headline worry that higher rates would hurt them.
That nonsense stopped abruptly when Fed chair Janet Yellen basically slapped a “Buy” rating on the entire sector! Her dovish outlook was taken as a cue that CEF investors could breathe easy and, once again, collect their 8% yields in peace.
This cue was unnecessary. For starters, anyone who mistook Yellen’s Fed as hawkish was, well, mistaken. And has been for years.
Also, higher rates don’t really hurt CEFs.
The theory scares people because it sounds true. Closed-ends have the benefit of borrowing money at Libor to lever up their returns. Libor is tied closely to the Fed funds rate. So, the thinking goes, higher Fed rates will end the “cheap money” party that benefits CEFs. …