PCN: This Is A Good Bond CEF, But Do Not Ignore The Risks

seekingalpha07-23

The PIMCO Corporate & Income Strategy Fund offers a high yield of 10.04%, beating inflation, but bonds may not hold value in an inflationary environment.The fund's leverage is lower than peers, ...

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}\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\">\nPCN: This Is A Good Bond CEF, But Do Not Ignore The Risks\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-07-23 00:13 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4705516-pcn-good-bond-cef-do-not-ignore-risks><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The PIMCO Corporate & Income Strategy Fund offers a high yield of 10.04%, beating inflation, but bonds may not hold value in an inflationary environment.The fund's leverage is lower than peers, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4705516-pcn-good-bond-cef-do-not-ignore-risks\">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":"BK4581","symbol_name":"高盛持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4705516-pcn-good-bond-cef-do-not-ignore-risks","article_id":"2453574790","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/145868159/image_145868159.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2453574790","pubTimestamp":1721664816,"columns":[],"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"The PIMCO Corporate & Income Strategy Fund offers a high yield of 10.04%, beating inflation, but bonds may not hold value in an inflationary environment.The fund's leverage is lower than peers, reduci","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4581":"高盛持仓","JMM":"Nuveen Multi-Market Income Fund","BK4588":"碎股","BK4550":"红杉资本持仓","WEA":"Western Asset Premier Bond Fund","VBF":"范·卡本债券基金","CEF":"Sprott Physical Gold & Silver Trust","JNK":"债券指数ETF-SPDR Barclays高收益债","AGG":"债券指数ETF-iShares Barclays综合国债","BHK":"黑岩核心债券信托","JHS":"JHS基金","BK4585":"ETF&股票定投概念","PCN":"太平洋投资管理企业投资基金"},"translate_title":"PCN：这是一个很好的债券CEF，但不要忽视风险","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"US12M.BOND":1,"WEA":1,"VBF":1,"US7Y.BOND":1,"US6M.BOND":1,"US5Y.BOND":1,"US3Y.BOND":1,"US30Y.BOND":1,"US2Y.BOND":1,"AGG":1,"US10Y.BOND":1,"PCN":1,"JNK":1,"JMM":1,"JHS":1,"CEF":1,"BHK":1,"US912797GK78.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6},"content_text":"The PIMCO Corporate & Income Strategy Fund offers a high yield of 10.04%, beating inflation, but bonds may not hold value in an inflationary environment.The fund's leverage is lower than peers, reducing risk for investors concerned about principal preservation.Despite consistent distributions, the fund struggled to cover them in 2024, and shares are trading at a high premium, suggesting caution for potential investors.The PPI suggests that cutting interest rates in September could be a bad decision by the Federal Reserve, despite the market's current expectations.This is a good bond fund, but it is important to consider the risks before deciding whether or not it is right for your portfolio.   Yuji Sakai The PIMCO Corporate & Income Strategy Fund (NYSE:PCN) is a closed-end fund that income-focused investors can employ as a method of achieving their goals. Unfortunately, the fund is probably not going to be as good at this as an equity closed-end fund due to the simple fact that bonds are not going to hold their value in an inflationary environment. I explained this general concept in a previous article that illustrates that the yield of many fixed-income funds is actually lower than inflation due to problems with the way that the official numbers are calculated. Larry Summers, former U.S. Treasury Secretary, states the same thing in a Forbes editorial. The general belief is that the true rate of inflation is roughly double the reported number, which would put it at somewhere around 6% right now. The current 10.04% yield of the PIMCO Corporate & Income Strategy Fund does fortunately beat this, but this does not change the fact that bonds are redeemed at face value so they cannot maintain their purchasing power over time unless the inflation rate is zero. As we will see later in this article, there are some reasons to believe that inflation will reignite if the Federal Reserve actually follows through on its current goal of reducing interest rates in the near future so that is a very real risk here. With that said though, this inflation problem makes it very difficult to recommend buying any fixed-income fund, especially if it is being held in a taxable account. As is the case with most of PIMCO’s funds, the current yield of the PIMCO Corporate and Income Strategy Fund is pretty attractive compared to similar funds offered by other managers. As already mentioned, the fund’s current yield is 10.04%. Here is how that compares with some of this fund’s peers:   Fund Name Morningstar Classification Current Yield   PIMCO Corporate & Income Strategy Fund Fixed Income-Taxable-Investment Grade 10.04%   BlackRock Core Bond Trust (BHK) Fixed Income-Taxable-Investment Grade 8.21%   Invesco Bond Fund (VBF) Fixed Income-Taxable-Investment Grade 5.35%   John Hancock Income Securities Trust (JHS) Fixed Income-Taxable-Investment Grade 4.16%   Nuveen Multi-Market Income Fund (JMM) Fixed Income-Taxable-Investment Grade 5.46%   Western Asset Premier Bond Fund (WEA) Fixed Income-Taxable-Investment Grade 7.81%   Click to enlarge As we can clearly see, the PIMCO Corporate & Income Strategy Fund has a considerably higher yield than any of its peers. This seems almost certain to attract investors who wish to maximize the level of income that they earn from their portfolios. However, it can be risky to chase yield due to the simple fact that above-market yields can be a sign that the various participants in the market expect that the fund will not be able to sustain its payout at the current level. We will want to have a closer look at this fund to determine whether or not this is the case. As regular readers can no doubt remember, we previously discussed the PIMCO Corporate & Income Fund in the second half of March 2024. The bond market since that time has been fairly weak, although in the past week or two we have seen bond prices go up rapidly due to the weak inflation report that has prompted the market to predict interest rate cuts at the September 2024 meeting of the Federal Open Market Committee. Overall, though, we might expect that the performance of this fund has been mixed since our last discussion. This is indeed the case, as shares of the fund have declined by 1.82% since the publication date of the previous article:   Seeking Alpha We can immediately see that the fund’s share price performance was very disappointing compared to the Bloomberg U.S. Aggregate Bond Index (AGG) and the Bloomberg High Yield Very Liquid Index (JNK). This is unsurprising as this fund’s share price has been underperforming both indices for quite some time now. For example, take a look at the three-year price chart:   Seeking Alpha This is likely to be very disappointing for potential investors, but it is also unsurprising. Nearly all fixed-income closed-end funds suffered substantial share price declines over the past three years along with underperforming the indices. This is simply due to the fact that they use leverage as part of their investment strategies, and this leverage amplified the losses that these funds took when the price of bonds declined in 2022 and 2023. However, the fund’s share price does not provide a clear picture of how well investors in this fund actually did over time. As I stated in my previous article on this fund: The share price performance of a closed-end fund does not tell the whole story. That is because these funds typically pay out most or all of their investment profits to their shareholders in the form of distributions. The basic objective is to keep the fund’s asset base at right around the same level over time while paying out all of the profits to the investors. This is the reason why these funds tend to have higher yields than just about anything else in the market. It also means that investors will almost certainly do much better than the share price performance suggests because they receive the distributions that provide a real return. The PIMCO Corporate & Income Strategy Fund boasts a substantially higher yield than either the domestic investment grade or the domestic junk bond indices. As such, the distributions will lift its total return by a much greater extent than the distributions paid by the indices. Here is how the PIMCO Corporate & Income Strategy Fund compared to the two domestic bond indices since the date of our previous discussion:   Seeking Alpha As we can clearly see, the PIMCO Corporate and Income Strategy Fund still underperformed domestic bonds since late March even after we consider the positive impact of the fund’s large distribution. However, we can see that nearly all of that poor performance comes from a steep share price decline in early April. The fund has been rapidly gaining on the two indices since that time. As readers might recall, I pointed out that this fund was substantially overpriced back in late March so we might be seeing the effect of a correction here. As roughly four months have passed since the last time that we discussed this fund, it would be reasonable to assume that a great many things have changed. This article will focus specifically on these changes as well as provide an updated thesis for the fund. This might be important right now given the growing talk of impending interest rate cuts. About The Fund According to the fund’s website, the PIMCO Corporate & Income Strategy Fund has the primary objective of providing its investors with a very high level of current income. This makes a lot of sense given the fund’s strategy, which is explained in detail on the website:  Using a dynamic asset allocation strategy that focuses on duration management, credit quality analysis, risk management techniques, and broad diversification among issuers, industries and sectors, the multi-sector fund seeks high current income, with a secondary objective of capital preservation and appreciation. 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. The Fund will normally maintain an average portfolio duration of between zero and eight years.  This description clearly states that the PIMCO Corporate and Income Strategy Fund focuses its efforts on investing in bonds, which is not really surprising for a PIMCO fund. After all, this particular fund manager made a name for themselves as a quality fixed-income investment house and while it does offer some equity funds, these are not nearly as well known or as well respected. As I explained in the previous article: As a rule, bonds provide all of their investment return in the form of direct payments to their investors. A bond investor purchases a newly issued bond at face value, collects a regular coupon payment from the issuer that corresponds to interest on the loan, and then receives the face value back when the bond matures. There are no net capital gains over the life of the bond because bonds have no inherent link to the growth and prosperity of the issuing company. Thus, the bond’s yield is the only source of net investment returns. As such, a current income objective makes sense for any bond fund. That is the primary objective of the PIMCO Corporate & Income Strategy Fund so there does not appear to be any confusion with respect to the basic purpose of this fund. The fund seems to be complying with its basic mandate of investing in bonds and other income-producing securities. The third-quarter 2024 holdings report states that the fund held the following asset allocation on March 31, 2024:   Asset Type % of Net Assets   Loan Participations and Assignments 30.1%   Corporate Bonds and Notes 34.9%   Convertible Bonds and Notes 0.3%   Municipal Bonds and Notes 2.5%   Non-Agency Mortgage-Backed Securities 10.4%   Asset-Backed Securities 9.5%   Sovereign Issues 3.9%   Common Stock 9.9%   Rights 0.0%   Warrants 0.0%   Preferred Securities 1.1%   Real Estate Investment Trusts 0.5%   Short-Term Instruments 2.5%   Investments in Affiliates 11.0%   Click to enlarge Readers who do the math will notice that these figures sum to 116.60% of the fund’s net assets. This is possible due to the fund’s use of leverage. Basically, it is borrowing money to allow it to own more securities than its net assets would ordinarily allow. We will discuss this in more detail later, for now it is simply important to note that this allows the fund to collect coupon payments from more securities than it could without the leverage. This allows its portfolio income to be higher than we would ordinarily expect from a bond fund. One interesting thing here is the “Investments in Affiliates” category. This is something that we do not usually see in a fund’s Schedule of Investments, and at 11.0% of the fund’s net assets, it is also not something that we should ignore. Fortunately, it does not appear that this is anything that we need to be concerned about as this appears to be an enhanced cash fund run by PIMCO:   PCN Q3 2024 Holdings Report The Securities and Exchange Commission filing for the PIMCO Short-Term Floating NAV Portfolio III states that it is a privately held short-term liquid fund, presumably for use by PIMCO’s various funds. While it does appear that the PIMCO Corporate & Income Strategy Fund is using this much like it would use a money market fund, it is not a money market fund, strictly speaking. The filings state that the PIMCO Short-Term Floating NAV Portfolio III can invest some of its assets in emerging markets, which a money market fund would ordinarily be barred from doing. In addition, the PIMCO Short-Term Floating NAV Portfolio III does not attempt to maintain a stable $1.00 net asset value like a money market fund would. Thus, while the PIMCO Corporate & Income Strategy Fund appears to be using this much like a money market fund (as a short-term cash equivalent position), it is riskier than one and that could have an impact on the fund’s overall returns. The fact that this enhanced cash fund appears to be riskier than most could explain why 11% of the fund’s net assets are sitting in it, which seems a bit high for a cash position. The managers want to make sure that the PIMCO Corporate & Income Strategy Fund still has sufficient cash to meet its obligations even if that enhanced cash fund suffers some losses. Interest Rate Outlook It is unlikely to be a surprise to anyone reading this that the most recent inflation report caused a market surge as various participants began to optimistically expect that the Federal Reserve will cut interest rates at its September meeting. From the Associated Press: The latest inflation readings will likely help convince the Fed’s policymakers that inflation is returning to their 2% target. A brief pickup in inflation early this year had caused the officials to scale back their expectations for interest rate cuts. The policymakers said they would need to see several months of mild price increases to feel confident enough to cut their key rate from its 23-year high. The headline inflation rate when measured on a year-over-year basis has now declined for four straight months:   Trading Economics This is certainly a better trajectory than what was occurring previously, and it makes sense that the market would now assign a 94% probability that interest rates will be reduced in September:   Chicago Mercantile Exchange The July predictions show that the market expects that the Federal Reserve will hold interest rates stable at the meeting later this month. Thus, the market is saying that there will be an interest rate cut in September followed by two more in November and December. However, this may not happen for a few reasons. One is the obvious political fallout that could occur if the Federal Reserve cuts too close to the presidential election. There could be fallout from either side in the election. For example, the boost in stock and bond prices that would accompany a rate cut could be perceived as an attempt to bolster the incumbent party. However, an interest rate cut could also be perceived as a sign that the real economy is weakening and that could hurt the incumbent party in the election. Chairman Powell’s position at the Federal Reserve could depend on who wins the next election, so it is in his interest not to anger either candidate. This might cause the Federal Reserve to hold off on interest rate cuts until after the election just to avoid political criticism. Perhaps a bigger concern though is that the core producer price index has been showing a very different trend than the headline inflation rate. This chart shows the rate of change on an annual basis of the core producer price index over the past year:   Trading Economics This shows that the rate of change of the core producer price index has been accelerating during the same period that the consumer price index was declining. This suggests that over the past three to four months, businesses have been allowing their profit margins to decline in order to avoid passing price hikes on to consumers. This is probably a contributing factor to the tame inflation reports that have been being published recently. A business cannot allow its profit margin to continually decline and will at some point have to pass through its increasing costs to consumers. Thus, a case could be made for a possible reversion of the current positive trend with the headline inflation numbers. The Federal Reserve is not generally believed to pay much attention to the producer price index. Chairman Powell has repeatedly stated though that he does not want to cut too early and risk a resurgence in inflation that forces the central bank to start hiking rates again. This data is stating that is exactly what could happen if the Federal Reserve cuts in September. The market right now is pricing in an interest rate cut in September. A lot of Fed watchers who I respect are saying the same thing. However, it might be a mistake for investors to bet the farm on that scenario, as political considerations and declining business profit margins might make that a foolish decision on the part of the Federal Reserve. If the Federal Reserve does not cut in September, then the price of the assets held by the PIMCO Corporate & Income Strategy Fund could decline. The share price might also fall in such a scenario. Anyone who owns this fund or purchases it in the near future should be aware of this possibility. Leverage As is the case with most closed-end funds, the PIMCO Corporate & Income Strategy Fund employs leverage as a method of boosting the effective yield that it earns from the assets in its portfolio. I explained how this works in my previous article on this fund:  In short, the fund borrows money and uses that borrowed money to purchase bonds and similar securities. As long as the purchased assets have a higher yield than the interest rate that the fund has to pay on the borrowed money, the strategy works pretty well to boost the effective yield of the portfolio. As this fund is capable of borrowing money at institutional rates, which are considerably lower than retail rates, this will usually be the case. It is important to note though that this strategy is not nearly as effective today with rates at 6% as it was three years ago when rates were at 0%. The use of debt in this fashion is a double-edged sword because leverage boosts both gains and losses. Thus, we want to ensure that the fund is not employing too much leverage as that would expose us to too much risk. I generally do not like to see a fund’s leverage exceed a third as a percentage of its assets for this reason.  As of the time of writing, the PIMCO Corporate & Income Strategy Fund has leveraged assets comprising 13.96% of its overall portfolio. This is a substantial decrease from the 17.56% leverage that we saw the last time that we discussed it. It is interesting that the fund’s leverage declined since late March 2024 as its net asset value has also declined:   Barchart As we can see, the fund’s net asset value is down 1.64% since that previous article was published. This would ordinarily cause a fund’s leverage to go up because a decline in net asset value does not erase any of its outstanding borrowings. In fact, a decrease in net asset value would result in the fund’s leverage accounting for a larger proportion of its assets. Thus, the PIMCO Corporate & Income Strategy Fund must have paid down some of its borrowings since the time of our previous discussion. It is surprising that the fund would do this, especially because its leverage was not particularly high to begin with. It is possible though that the fund’s management started seeing that interest rates were likely to remain higher for longer earlier in this year and so decided to reduce the fund’s risks. If that is the case, then it was a pretty smart move on the fund’s part. The leverage of the PIMCO Corporate & Income Strategy Fund is a bit lower than that of its peers. We can see this here:   Fund Name Leverage Ratio   PIMCO Corporate & Income Strategy Fund 13.96%   BlackRock Core Bond Trust 33.19%   Invesco Bond Fund 0.00%   John Hancock Income Securities Trust 39.65%   Nuveen Multi-Market Income Fund 27.95%   Western Asset Premier Bond Fund 31.22%   Click to enlarge (all figures from CEF Data) As we can clearly see, the leverage ratio of the PIMCO Corporate & Income Strategy Fund is substantially lower than that of any of its peers except for the unleveraged Invesco Bond Fund. However, its yield is much higher than the Invesco Bond Fund so there is an obvious trade-off here. I think most readers would prefer the higher yield of this fund over its unleveraged peer. The fact that this fund’s leverage is lower than its peers is likely to be attractive to risk-averse investors. After all, that should mean that the fund’s net asset value will not decline as much as its more leveraged peers in the event that interest rates are not cut to the degree that the market currently expects. As most individuals who would consider buying a fund like this are somewhat concerned about the preservation of principal, this is a highly attractive characteristic. Distribution Analysis The primary objective of the PIMCO Corporate and Income Strategy Fund is to provide its investors with a very high level of current income. To that end, the fund pays a monthly distribution of $0.1125 per share ($1.35 per share annually). This gives the fund’s shares a 10.04% yield at the current share price. Unlike most fixed-income funds, this one has been remarkably consistent with respect to its distributions over its history:   CEF Connect As I stated in my previous article on this fund: As is immediately apparent, the PIMCO Corporate & Income Strategy Fund has been able to keep its distribution stable since 2012, and even before that it had a very stable track record. This makes this fund one of the only bond funds to achieve such a performance, especially considering that interest rates have not been stable over that period. Indeed, the United States even experienced two widespread economic and financial disruptions over the period shown above that forced the Federal Reserve to make rapid policy changes. As such, we will want to have a closer look at this fund’s finances, as it is difficult to believe that it was able to deliver a stable investment performance over the more than twenty-year period when most other bond funds could not. The last thing that we want to experience here is a situation where the fund is destroying its net asset value by distributing more than it is able to earn from its investment portfolio. That is not a sustainable scenario over any sort of extended period. As of the time of writing, the most recent financial report that is available for the PIMCO Corporate & Income Strategy Fund is the semi-annual report for the six-month period that ended on December 31, 2023. This is the same report that was available the last time that we discussed this fund, so there is no point in reposting the same analysis. Suffice it to say that the fund did manage to fully cover its distributions during the second half of 2023, but that was only due to a substantial amount of unrealized capital gains. Unfortunately, it appears that the fund has been struggling to maintain its distribution so far in 2024. This chart shows the fund’s net asset value since December 29, 2023 (the final trading date of the previous reporting period):   Barchart As we can see, the fund’s net asset value has decreased by 1.30% since the closing date of the most recent financial report. This clearly tells us that the PIMCO Corporate & Income Strategy Fund has failed to earn sufficient investment profits to cover all of the distributions that it has made to its shareholders since that time. This is a concerning situation, and we will want to keep an eye on the fund’s net asset value going forward to ensure that it is not destroying its net asset value. If it does end up consistently destroying its net asset value, then it will be forced to cut the distribution. Nobody wants that scenario, particularly as we are not in an environment where prices are declining. Valuation Shares of the PIMCO Corporate & Income Strategy Fund are currently trading at a 17.67% premium on net asset value. This is an enormously high price that is higher than the 15.88% premium that the shares have traded at on average over the past month. As such, it is probably a good idea to wait for a better entry point before buying shares. Conclusion In conclusion, the PIMCO Corporate & Income Strategy Fund continues to be a decent bond fund, but the price is rather difficult to justify. The fund does boast a much higher yield than its peers, but it has not fully covered it so far in 2024 and this could present a problem going forward, especially if the market is too optimistic about the direction of interest rates. There are signs that a resurgence of inflation is coming at some point and an interest rate reduction may not be the best course of action for the nation’s central bank. This does not mean that there will be no interest rate cuts, but it could mean that the Federal Reserve has to start raising interest rates again following any cut. Thus, potential investors might want to keep in mind that we could see a share price decline at some point for this fund. This could be devastating considering that it looks very expensive. While this is a very good bond fund, it is important to consider the risks before initiating or adding to a position.  Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"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":"4.29.3","shortVersion":"4.29.3","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/2453574790"}