Closed-end Funds Battered by Market Volatility
NEW YORK (MainStreet)--Leveraged closed-end funds (CEFs) have been hammered over the past two months, but so far without credit rating implications, according to Fitch. The ratings agency says the notes and preferred stock issued by U.S. CEFs are conservatively positioned and have operated with an ample cushion to maximum leverage thresholds, justifying their continued 'AAA' and 'AA' ratings.
The recent rise in U.S. Treasury yields and speculation surrounding possible changes in the Fed's buying program led to leverage ratio increases and discounts widening for leveraged CEFs, according to Fitch.
The municipal CEF sector has been pummeled the most considering the high leverage ratios and long duration of portfolio assets within the class. The average sector NAV fell 13% to a low point on June 24, while secondary market discounts on CEF's common stock widened five times to a low point of -6.6% on June 3, underscoring investor sentiment.
The average leverage ratio for municipal funds rose to 39% on June 24 from 36% at the beginning of May, with at least five CEFs exceeding 45% leverage from June 20 forward. Fitch notes that CEFs operating with new term leverage, such as the Fitch-rated variable municipal-term preferred stock, are required by the governing documents to begin deleveraging their portfolios when ratios exceed 45%. The rating agency has been in contact with the affected fund(s). Taxable CEFs have also suffered in the recent market volatility. Longer duration strategies (such as government bond and preferred stock closed-end funds), as well as riskier portfolios (such as multisector and emerging market) were the most affected, as average NAVs fell 7%-8%.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV