Investors can grab double-digit yields with these buy-rated funds, according to Bank of America

Bank of America Securities recommends income-seeking investors consider closed-end funds (CEFs) for double-digit yields, despite their year-to-date rally, as anticipated Federal Reserve rate cuts are poised to reduce cash yields. Strategist Jared Woodard highlights specific CEF categories like loans, multi-sector, and convertibles, which offer 11%+ yields, alongside favored municipal bond, real estate, and tax-advantaged equity funds, noting their attractive discounts and distribution rates. While valuations may not always be attractive, and high fees and leverage are factors, BofA sees opportunity given the expected decline in cash returns.

Analysis

Bank of America Securities presents a bullish case for income-oriented investors to consider closed-end funds (CEFs), citing a confluence of high current yields and an impending shift in the macroeconomic landscape. The core thesis hinges on the Federal Reserve's anticipated rate cuts, with markets pricing in a 92% probability of a cut in September, which is expected to erode the yields on the more than $19 trillion held by U.S. households in cash and equivalents. BofA notes that sectors such as loans, multi-sector, and convertibles are offering yields of 11% or more, which is over one standard deviation above their long-term averages. While overall CEF valuations are not deemed exceptionally attractive, specific opportunities exist where funds trade at a discount to their net asset value. For instance, BlackRock Municipal Income (BFK) trades at a 7.72% discount, while the MLP sector as a whole trades below its long-term average discount. In contrast, a top pick like PIMCO High Income Fund (PHK) commands a 6% premium for its 11.61% distribution rate and strong risk-adjusted returns. Investors are cautioned, however, about the inherent risks, including fees that can exceed 1% and the common use of leverage, which magnifies both potential gains and losses.

Key Decisions for Investors

• Income-seeking investors should consider rotating from cash into select closed-end funds to capture high current distribution rates before anticipated Federal Reserve rate cuts diminish yields on cash equivalents.
• Focus on CEF sectors trading at a meaningful discount to their long-term average valuations, such as Master Limited Partnerships (MLPs) or specific municipal bond funds like BlackRock Municipal Income (BFK), to enhance total return potential.
• Evaluate high-yielding funds like PIMCO High Income Fund (PHK) on a risk-adjusted basis, recognizing that its premium valuation is supported by strong performance, but also be prepared for higher volatility.
• Before investing, thoroughly vet the fee structure and use of leverage for any target CEF, as these factors can significantly impact net returns and increase portfolio risk, particularly in volatile markets.