PTY CEF: 2023 Replay

seekingalpha05-07

lucky336/iStock via Getty Images PTY CEF yields ~10% I’ve written two articles on the PIMCO Corporate and Income Opportunity Fund (NYSE:NYSE:PTY) in 2023 as seen in the chart below. In both articles, ...

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In both articles, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4690137-pty-cef-2023-replay\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>PTY CEF: 2023 Replay</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPTY CEF: 2023 Replay\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-07 23:33 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4690137-pty-cef-2023-replay><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>lucky336/iStock via Getty Images PTY CEF yields ~10% I’ve written two articles on the PIMCO Corporate and Income Opportunity Fund (NYSE:NYSE:PTY) in 2023 as seen in the chart below. In both articles, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4690137-pty-cef-2023-replay\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK7104","symbol_name":"黄金","start_time":0,"source_url":"https://seekingalpha.com/article/4690137-pty-cef-2023-replay","article_id":"2433782550","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/539216691/image_539216691.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2433782550","pubTimestamp":1715096003,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"lucky336/iStock via Getty Images PTY CEF yields ~10% I’ve written two articles on the PIMCO Corporate and Income Opportunity Fund (NYSE:NYSE:PTY) in 2023 as seen in the chart below. 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In both articles, I cautioned potential investors about the risks lurking behind the closed-end fund's (\"CEF\") generous yield. Quote: PTY’s yielding ~10% currently, and dividends are paid monthly - a quite appealing combination. However, potential investors should be aware of the risks lurking behind the yield. The yield is not that attractive when properly benchmarked. Macroscopic risks such as high interest rates and credit risks are likely to cause price depreciation at the same time. Especially in September 2023, I was worried that PTY’s particular exposure (more on in a later section) would make it respond badly to rising interest rates and tighter (i.e., more negative yield spread) macroeconomic conditions. Indeed, PTY suffered a substantial downward correction shortly afterward, as you can see from the chart.   Seeking Alpha Today, PTY’s yield is about 10% again, as seen in the next chart. And I see a very parallel set of risks (the risks are even greater in some respects) compared to September 2023. Thus, the goal of this article is to warn potential investors about the risks lurking behind the 10% dividend yield again. First, the yield is again not as high as on the surface once properly benchmarked. As outlined in the chart below, PYT’s current yield (9.83%) is significantly lower than its 4-year average (10.27%) and also below its sister funds such as PIMCO Dynamic Income Opportunities Fund (PDO) and PIMCO Dynamic Income Fund (PDI). Moreover, risk-free rates have also increased since my last writing. For instance, 10-year treasury rates (US10Y) were around 4% in September 2023. But the rate is around 4.5% now. Thus, with the same ~10% yield from PTY, its risk premium relative to treasury rates has heightened. But what’s more concerning to me is PTY’s exposure, as detailed in the next section.   Seeking Alpha PTY CEF’s holdings As described in PTY’s fund description (quoted below with the emphases added by me), it focuses on fixed-income instruments with substantial exposure to high-yield instruments and mortgage-related assets:  Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets plus borrowings for investment purposes in a combination of corporate debt obligations of varying maturities, other corporate income-producing securities, and income-producing securities of non-corporate issuers, such as U.S. Government securities, municipal securities and mortgage-backed and other asset-backed securities issued on a public or private basis. The fund may invest a maximum of 25% of its total assets in non-U.S.-dollar-denominated securities and a maximum of 40% of its total assets in securities of issuers located in emerging market countries. The fund will normally maintain an average portfolio duration of between zero and eight years.  As we dig into the specific holdings, we can indeed see such exposures reflected in its holdings. And as seen in the chart below, U.S. government-related assets (such as inflation-protected Treasuries, Treasury futures and options, etc.) represent the largest exposure with about 4.4% of allocation by market value and more than 33% of allocation in terms of duration-adjusted weight (“DWE”). Then the next largest exposure is mortgage-related securities, representing a weight of 13.5% by market value and close to 19% in terms of DWE. The third-largest exposure involves high-yield credit (almost 30% by market value and more than 15% in terms of DWE. Next, we will explore the risks caused by such holdings in more depth.   PTY fund description PTY CEF faces similar risks as in 2023 I have a gloomy outlook for mortgage-related instruments in the near future. We have recently published articles dedicated to mREIT stocks, detailing our thought process. Here, to stay focused on PTY, only the gist of my reasoning is quoted: Mortgage-related assets are sensitive to the yield spread between long-term rates and short-term rates. The thicker the long-short spread, the easier it is for mREITs to make money. The business model of mREITs is to primarily invest in mortgage-backed securities (“MBS”), which offer fixed interest rates based on the prevailing rates at the time of issuance. Wider spreads mean their longer-term MBS holdings generally offer higher interest rates compared to the shorter-term borrowings they use to finance these investments. This difference in rates widens their net interest margin (“NIM”), leading to increased profitability. The above is the key reason for my SELL rating back in September 2023. As illustrated by the chart below, the yield curve became slightly negative at that time (10-year rates were about 0.17% below 2-year rates). I expect the yield curve to become more inverted (i.e., I expect the spread between long-term treasury rates and short-term rates to become more negative) given the concerns about inflation and the Fed’s response to it. This was indeed what happened, causing the large correction PTY suffered shortly afterward as aforementioned.   FRED Today, the yield spread is slightly negative again and hovers near zero as seen in the chart above. So, the question is naturally this: will the yield spread A) keep widening and becoming positive or B) reverse the recent trend and become more negative again? I see much larger odds for case B than A for several reasons. To start, the Fed’s policies only influence short-term rates. And I don’t expect the Fed to lower the short-term rates any time soon, given the recent inflation data (see the following March CPE data as an example): The Core PCE Price Index, the Federal Reserve's preferred measure of underlying inflation, rose 0.3% M/M in March matching the +0.3% consensus and the +0.3% pace logged in February. The core PCE number strips out volatile energy and food prices, which the Fed says provides a better view of inflation trends. By that measure, inflation kept up its elevated pace of the previous two months. Then, on the long-term end, these rates are mainly influenced by market supply and demand. With all the macroscopic risks afoot (to name a few, geopolitical risks, inflation, or even stagflation concerns, etc.), the market tends to have a higher demand for safe assets, and long-term U.S. treasury bonds are a primary (if not the primary) safe-haven asset. Yields from 10-year and 30-year (US30Y) treasury bonds both approached 5% recently. It is not the worst investment idea for investors to lock in a 5% return for the next 10 or 30 years with all the ongoing uncertainties. Such demand tends to push down yields on the long-term ends. Combining the effects on the short- and long-end of the rate spectrum, I see case B to be far more likely than case A, and consequently large risks for PTY’s holdings. Other risks and final thoughts Other downside risks involve pricing premiums and also the use of leverage. As seen in the chart below, the fund is currently trading at a premium of ~28% regarding its NAV, a substantial premium in both absolute and relative terms (e.g., relative to its historical premium levels).   CEFConnect The fund also applies a substantial amount of leverage, as seen in the chart below. Its effective leverage is 21.6%. With my above outlook for borrowing rates, such leverage could mean more interest expense for the fund.   CEFConnect Although on the positive side, leverage is a double-edged sword that could magnify returns if things develop in a positive direction. And IF you do want to apply leverage (I am not suggesting you do under current conditions), leveraging through a fund like PTY is far better than doing it yourself, in my view. As a large and credible institution, PIMCO has access to better borrowing rates and better liquidity than individual investors when things go in the negative direction. PIMCO also boasts unmatched experience in my view for activating and managing fixed-income portfolios. Their professional portfolio managers can help investors navigate multiple fixed-income sectors as those mentioned above and find investment opportunities that are less accessible to ordinary investors.  To conclude, my verdict is that there are more downside risks than upside risks under current conditions. In particular, I see a very parallel set of macroscopic conditions now compared to that in September 2023, including inflation and the yield spreads. Due to these conditions, I am concerned that PIMCO Corporate and Income Opportunity Fund’s 10% yield won’t be sufficient to compensate for these risks and investors could still suffer a negative total return in the next 1~2 years.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2433782550"}