I'm not a pack rat, but I saved the October 6, 2008 issue of
The New Yorker
Only weeks earlier, the investment bank Lehman Brothers had failed
and the markets were spiraling downward. As always, the magazine
had its signature cartoons that perfectly captured the times. In
this issue there were a number that summed up the dour sentiment of
In one cartoon, a man walks into his bedroom to discover his wife
cheating on him. The caption reads: "Not on the mattress where we
keep all our money!"
During the market downturn, one enterprising company even released
a product called "The Mattress Wallet." Fashioned like a miniature
mattress, the wallet was marketed with tongue-and-cheek campaigns,
designed to connect with concerned investors. In one ad, the
"M.R.O.R" (mattress rate of return) of 0% was shown to be superior
to the market's double-digit decline.
As the market continued to slide, investors' money piled up on the
sidelines. And when the government announced it would temporarily
guarantee money market funds, the cash rolled in. True, the yield
on money market funds had fallen to less than 1% by December 2008
-- only marginally better than a mattress.
But the trend to "take to the mattresses" began to slowly unwind
over the course of the market's subsequent rally. The mattresses --
and the money market accounts -- have been raided to fund
In March 2010, U.S. investors withdrew $148.2 billion from money
market accounts -- much of it making its way into the bond market.
The investment research company Morningstar reported that 75% of
the inflows into mutual funds in March went into bond funds.
High-yield bond sales in the first quarter of 2010 were $61 billion
-- the highest since 1980, when the sales were first tracked.
While this has been great news for existing bond holders, new
investors are having a tougher time finding good bond yields at a
reasonable price. This is especially true in the universe of
closed-end bond funds. Only a few months ago, investors could buy
into a closed-end bond fund for less than the net asset value (
) of its portfolio. Now that the "mattress rally" is in full swing,
those bargains are far fewer today.
In fact, a number of closed-end bond funds are trading at premiums.
Buying a fund at a premium isn't always a bad thing. Some funds
normally trade at a premium. And for that matter, some funds
normally trade at a discount. But we're starting to see the prices
of many closed-end funds trade above their historic range -- at
narrower discounts or higher premiums -- than they have during the
past few years.
As an example, I've graphed the price premium/discount for the
Western Asset High Income Fund (
over the last five years.
This recent trend of rising premiums introduces a little more price
risk for closed-end bond funds. And it's something we need to be
aware of. For instance, should these premiums start to erode back
toward their normal range -- as they could if interest rates rise
-- share prices could drop.
One of the things I always check when I'm researching a closed-end
fund for my
newsletter is its historic premium/discount range. I highly
recommend CEFConnect as a source for this data. It is a free
website that's easy to use.
I can say that there's one good thing from the market's recent
swoon: some of the premiums are beginning to close. While there are
still a number of funds trading above their net asset value, I am
keeping my eyes open for opportunities.
Editor: Stock of the Month, The Daily Paycheck
P.S. -- If you're interested in learning more about The Daily
Paycheck, please visit this link. I'd love for you to join me as I
continue building my portfolio!
Disclosure: Amy Calistri does not own shares of any security
mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.