Impact of Rising Rates on Bond Prices/Anika/EBI

This table of Closed End Funds reflects the recent sell of 100 IGI and the purchase of 300 IMF today. It is the intention of the current Head Trader here at HQ-the Fabulous LB- to sell either IMF or WIW at some point, based in part on which one of those two similar CEFs narrow their discounts to net asset value the most. Fabulous indeed, RB muttered, just a boring NERD focusing on picayune and immaterial details.

The Old Geezer thought this CEF portfolio was too volatile last week, and more consideration needs to be given by staff to reduce volatility which just makes the OG queasy, all of this up and down roller coaster stuff is getting to be tiresome for the OG. Although LB realized it was futile to explain anything to the OG, the information had nowhere to stick for more than a few seconds, it decided to humor the OG this one time. In times of market stress, such as the experience from last week, the net asset values of many CEFs will decline and the discounts to their respective net asset values will expand- the notorious double whammy. LB thought the OG grasps the double whammy investment concept. This is both a curse and a blessing for those interested in this asset class, LB added. It provides an opportunity to buy at more favorable prices that can be particularly beneficial for bond CEFs since the double whammy increases the yield. Unfortunately, it also means that the investor has suffered a diminution in value of existing holdings beyond what similar mutual funds experienced during such periods.

1. T. Rowe Price Spring 2010 Newsletter on Bond Fund Investing: The spring newsletter from T. Rowe Price contains information relevant to bond fund investors, starting on page 8: individual.troweprice.com _Spring 2010.pdf This is the second newsletter in recent memory from this mutual fund company that quantifies the risks to bonds resulting from rising rates. Unlike the prior newsletter discussed in Item # 3 to a post last March, this one has a lot more detail. The chart on page 8 has examples of the approximate impact on treasury securities, ranging in maturity from 2 to 30 years, from rising rates. For example, the chart shows that the duration of the bond has an important impact on its price sensitivity to rising rates. The 30 year treasury bond would go down more than a 10 year, and the ten year more than the five year, for every 1/4 point increase in rates. A 200 basis point rise would caused the ten year bond, yielding 3.83%, to lose 14.89% of its value but the 30 year would lose about 24.55%. The 2 year would lose less, just 3.85%, and the duration to maturity would allow the investor to more quickly recoup by holding until maturity.

The chart on page 10 has some helpful information on how different types of bonds react to changes in interest rates. The long treasury bond, viewed as having no or insignificant credit risk, is more sensitive to increases in rates than investment grade or high yield bonds. However, it must be kept in mind that high yield bonds have already enjoyed a robust rally in anticipation of an improving economy which reduces their credit risk profile. The iShares ETF for high bonds (HYG) closed today at $86.06, up $1.58, and bottomed with the stock market at $54.93 on 3/9/2009, adjusted for subsequent dividends: HYG: Historical Prices for iShares Trust iShares This kind of history suggests that an investor give high yield bonds serious consideration in the early stages of an economic recovery, when the spreads to investment grade bonds are high.

The NYT has a chart of the spread between high yield and investment grade bonds.

This spread can become very wide, as in October 2002 when it reached 8.21%, and then narrow as an economic recovery gathers steam. The spread narrowed to about 2.75% in July 2005.

This article from Fidelity contains a chart of historical spread between high yield bonds and the 10 year treasury between 9/1986 and 9/2008. As you would expect, the spread spiked in November 2008 providing a historic buying opportunity for anyone with the nerve to buy the junk bonds back then.

2. Anika (ANIK)(owned)(2010 Speculative Strategy): Anika Therapeutics reported earnings of five cents per share on a 35% increase in revenue. Excluding the revenue generated by Fidia Advanced Biopolymers, acquired in the 4th quarter of 2009, revenue increased 18% compared to the year ago quarter. The sales growth was due primarily to its drug ORTHOVISC, for the treatment of osteoarthritis of the knee. Sales of ORTHOVISC were up 44% in the U.S. compared to the 1st quarter of 2009. The next major milestone for Anika will be the FDA's decision on its MONOVISC drug which Anika hopes to receive this year in time to permit a launch of that product in the second half of 2010. Anika ended the quarter with over 23 million in cash, no debt, and has a market cap of around 92 million at a $6.85 price.

I checked the SEC filings for Anika tonight and saw a schedule 13G filing by Royce & Associates, dated 4/7/2010, claiming ownership of 2.75% of Anika's common stock. www.sec.gov/

Anika has already filed its 10-Q for the 1st quarter too: SEC 10-Q Q/E 3/31/2010

I previously mentioned in a prior post that a fund from R.I., called Eliot Rose Asset Management, had acquired a 8.3% stake: www.sec.gov; Item # 6 Bought 50 ANIK at 6.3

3. Dividends and Interest-EX on Wednesday May 12th (All securities mentioned in this section are owned): Several of the Trust Certificates that I own go ex interest on the 12th: WSJ.com Two of my better TC buys during the meltdown phase of the Near Depression were JZE and JZJ, both containing a senior AT & T bond. Both go ex interest for their semi-annual distributions this Wednesday. JZE was caught with a GTC limit order at $12.50. JZE: MORE DETAIL The two TCs containing the same Sprint Capital senior bond, DHM and GJD, also go ex interest, but this information is not shown at the WSJ (see Cobalts Tr For Sprint Cap Nt COBALS 8.125%, DHM & Strats Tr For Sprint Secs STRATS A1 6.5%, GJD) The pink sheet exchange has a more comprehensive listing of scheduled ex dividend dates, but does not generally show TC ex dates. This is hopefully the starting page of that site's information for securities going ex dividend or interest on the 12th. OTC Corporate Actions - Symbol-Name Changes, Splits

Several holdings are ex dividend for their quarterly distributions including Adams Express, DuPont, Emerson Electric, Exelon, Petroleum & Resources, American Software, the synthetic floater GYB, and Pitney Bowes. The following securities are ex dividend or interest for their monthly distributions: OSM (Sallie Mae CPI floater); WIW (a CEF with TIPs); Oriental Financial Preferred A ( Bought 50 OFGPRA at 19.55); the CEFs BTZ and PSY from Blackrock and the CEFs from Evergreen, EBI and ERC. Unilever (UL & UN) goes ex for its semi-annual dividend.

Going through this exercise every night gives me a good idea about incoming cash flow & what I will soon be able to buy with that stream of income. Looking at this WSJ page also gives me some ideas about possible purchases to generate additional cash flow.

4. Santander (STD)(own): I had never owned a stock based in Spain until I purchased STD a few days ago. I was curious about the foreign tax withholding rate. I received my quarterly dividend of $29.22 today. A fee of $.25 was charged and $5.55 was withheld for the foreign tax, which is 19%.

5. Evergreen International Balanced Income (own): While I was looking at the discounts to NAV for CEFs tonight, I noticed that EBI's discount to NAV had expanded to 16.24% as of 5/10/2010. WSJ.com I reinvested EBI's monthly dividends to buy additional shares until 2/2009 when I switched to cash distributions. Tonight, I changed the distribution option back to reinvestment in additional shares. For the most part, I am not reinvesting CEF dividends now with limited exceptions which include SWZ, JQC, IGR and now EBI.