by Ed Moisson.
On the heels of 15 100-point days (both up and down) for the Dow Jones Industrial Average in June and on fears of imminent Federal Reserve “tapering,” Lipper’s equity and fixed income CEF macro-groups posted negative returns on a NAV basis for the second consecutive month, losing 2.55% and 4.60%, respectively, for June. On a market-price basis both groups were also in the red, posting negative returns of 2.74% and 3.42%, respectively.
With the Fed signaling its intention to begin removing some of its easy-money provisions, both stock and bond investors have been put into a tailspin. Rising interest rates already have begun hammering spread products and dividend payers, while some pundits in stocks think that pulling the plug on quantitative easing is a signal for the end of the equity rally. This dependency has led many investors to take a twisted, contrarian approach to investing, battering the markets after reports of good economic news and raising the markets on bad news. In June the Fed indicated that purchases of mortgage-backed securities could be reduced as early as this year, with Federal Reserve Governor Jeremy Stein suggesting the first tapering move could occur as early as September. While Stein may have spooked investors, the simple fact is the Fed has begun to see improvement in the U.S. economy. In fact, much of the recent economic news has indicated slow but steady improvement on many U.S. economic fronts. In fact, much of the recent economic news has indicated slow but steady improvement on many U.S. economic fronts.
Despite the continued selloff in equities toward June month-end, investors continued to push Treasury prices lower on concerns the Fed is closer to ending its easy-money regime than previously thought, which sent benchmark ten-year Treasury yields to their highest close since August 3, 2011. After hitting a closing high of 2.60% late in the month, Treasury yields generally eased slightly, ending the month up 36 basis points (bps) at 2.52%.
For June only 6% of all CEFs posted NAV-basis returns in the black, with 13% of equity CEFs and a measly 1% of fixed income CEFs chalking up returns in the plus column. Investors ran for cover after Fed Governor Stein suggested the first tapering move could occur as early as September, since many economic numbers point toward an improving U.S. economy. Better-than-expected May new home sales, durable goods orders, and personal consumption outweighed the downward revision in first quarter GDP growth. For the first month since October 2008 all classifications in both the fixed income and equity CEFs universe were in the red for June.
For June the median discount of all CEFs narrowed 137 bps to 4.87%—much lower than the 12-month moving average discount (1.80%).
To read the complete Month in Closed-End Funds: June 2013 FundMarket Insight Report, please click here.