We are more than seven years into an economic expansion, but short-term interest rates are just a fraction of a point higher than they were during what many economists like to dramatize as a narrowly avoided depression (prevented by their heroic actions, of course). The Fed’s strategy of keeping rates in the tank to meet its ever shifting “economic goals” has created one of the greatest yield-reaching episodes in financial market history.
You have traditional bond investors trying to substitute higher risk dividend income for full-faith and credit pledge interest income. In bonds, junk has become the new investment grade. And long-bonds, with yields at record lows, are being touted as compelling capital gains opportunities.
The lack of yield has turned many investors into speculators. The Pimco Global StockPLUS & Income fund (PGP) is indicative of the type of mischief seven years of zero interest rates has encouraged.
PGP is a small closed-end fund that invests in futures contracts on the stock market and collateralizes them with a portfolio of actively managed bonds. There is nothing special about the fund’s investment strategy. PIMCO uses similar strategies in its open-end fund formats.
Prudent investors should stay far away from PGP.
The closed-end fund market is a tiny sliver of the broader financial markets, but it regularly offers some of the financial market’s most interesting opportunities for individual investors—opportunities that are too small for institutional investors to touch.
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Jeremy Jones, CFA
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