As income investors, should we buy any bonds right now? Bond prices have rallied, but the rear view mirror doesn't help any new money we're putting to work right now, explains Brett Owens, leading income expert and editor of Contrarian Outlook.
The past 12 months was about "as good as it gets" for US Treasury bonds. Their yields collapsed, especially recently, and their prices soared. Investors who held popular Treasury ETFs enjoyed once-a-generation windfalls from these safe bonds.
This party is unlikely to last because, well, it's running out of room. Even if long rates do go to zero, the 10-year pays just 1.6% today. A breather is in order.
More from Brett Owens: A Trio of High-Yielding Private Equity Style BDCs
For double-digit returns from safe bonds, we must move beyond all of this mainstream nonsense. Mutual funds and ETFs simply won't do. The good news is that we can boost our returns without taking on additional risk.
Aberdeen Asia-Pacific Income Fund (FAX) is a closed-end fund (CEF). It trades like a stock or ETF, yet management cannot issue or remove shares at will (hence "closed").
The fund pays 8% today and demonstrates how we contrarian-minded income investors profit from out-of-favor bond funds in 2019. Interest rates in the Europe, Japan and now the US are once again heading towards zero (or lower!) This is a nightmare for bond investors looking for income, but it's a dream for FAX longs like us.
FAX buys safe government and corporate bonds that pay 6%, 7% and even 8% or more. Its portfolio increases in value with each decrease in rates here in the US.
Its NAV is up 2.5% in the last three months alone. If you believe that rates are more likely to head lower than higher, then funds like FAX are great places for income and price appreciation.
Thanks to its closed-end fund nature, FAX trades at a 15% discount to its NAV. This means we're able to buy its collection of bonds for just 85 cents on the dollar. Contrast this with mutual funds and ETFs, which always trade around "par" at 100 cents on the dollar.
Why the discount? There are protestors in Hong Kong, tariffs coming from China and FAX's middle initial starts with "Asia." No joke, discounts in CEF-ville can often be this obvious.
With a market cap of barely a billion dollars, billionaires can't swoop up this discount like we can. Someone putting millions or more into one of these funds would move the price and eliminate the discount he or she was trying to buy! Fortunately, we don't have these "country club problems".
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