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Fixed Income

Closed-End Bond Funds: Few Jewels amid the Junk

By Roger S. Conrad, on Apr. 17, 2014

But closed-end bond funds find themselves between a rock and a hard place these days. 

Low interest rates mean that maturing bonds often must be replaced by issues that pay a lower coupon, diminishing funds’ cash flow. At the same time, the prospect of rising interest rates threatens to send bond prices lower. Throw leverage into the mix and management teams must walk a thin tightrope.

Small wonder that two of the funds highlighted in my Income Insights article recently slashed their monthly dividends.

DWS Strategic Income Trust (NYSE: KST), which holds a mix of corporate bonds and loan participations, on April 10 trimmed its payout to $0.0775 per share from $0.085 per share. The fund company provided little more than a boilerplate explanation for the reduction.

Meanwhile, Templeton Global Income (NYSE: GIM), cut its monthly dividend to $0.025 per share from $0.035 per share, citing “reduced yields available in government bonds.”

Management also emphasized that the fund’s position “in very low duration and short-maturity bonds [would] mitigate downside risk when interest rates rise.” At the same time, the fund’s lack of leverage and relatively low expense ratio of 0.73 percent likewise reduce risks and ensure that investors keep more of their money.

But Templeton Global Income’s yield of less than 3.8 percent doesn’t compensate investors adequately for taking the risk of another dividend cut if interest rates don’t rise this year.

This pair of dividend reductions, coupled with challenging conditions in the bond market, reinforces that jewels are hard to come by in a security class that’s rife with junk.

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