Friday, November 7, 2014

Sold: 100 IGI at $21.02 and 50 PNTA AT $25.52/Bought Roth IRA 200 BHK at $13.305

Big Picture: No Change

With inflation trending down, I am become more sanguine at the moment about leveraged bond CEFs that concentrate on U.S. securities. My foreign bond funds have been negatively impacted by the strength of the USD.

I still have a hair trigger on leveraged bond CEFs. I will likely use the proceeds realized from selling IGI, discussed in Item #1 below, to buy a higher yielding bond CEF or possibly back into IGI with more of a decline.

11/7/14 Closing Prices on Select Bond ETFs
TLT: $119.75 +1.36 (+1.15%) : iShares 20 Year Treasury Bond ETF
IEF: $105.17 +0.67 (+0.64%) : iShares 7-10 Year Treasury Bond  ETF
TIP: $113.62 +0.66 (+0.58%) : iShares TIPS Bond ETF
LQD: $119.11 +0.75 (+0.63%) : iShares Investment Grade Corporate Bond ETF
BAB: $29.97 +0.19 (+0.62%) : PowerShares Build America Bond ETF
MUB: $109.53 +0.25 (+0.23%) : iShares National AMT-Free Municipal Bond ETF
Recent Developments: 

The government reported that 214,000 jobs were added in October with the unemployment rate declining to 5.8% which is a 6 year low. Employment Situation Summary The forecast was for a 243,000 increase. Job gains were increased by 31,000 more than previously reported for August and September. The U-6 number declined to 11.5% from 11.8% in September. Table A-15. Alternative measures of labor underutilization Average hourly earnings increased by 3 cents to $24.57. Over the past year, average hourly earnings increased by 2%. The average work week edged up .1 to 34.6 hours.

ISM's services index for October was reported at 57.1%. The new orders index declined to 59.1 from 61 in September. The employment index increased to 59.6 from 58.5.

Markit U.S. services PMI for October was also reported at 57.1%, down from 58.9 in September. 

Bankruptcy filings in the fiscal year ending 9/30/14 declined by 13%, with the total number being the lowest since 2007. Fiscal Year Bankruptcy Filings Lowest in Seven Years | United States Courts

For the week ending 11/1/14, the 4 week moving average for initial unemployment claims was reported at 279,000, the lowest level since 4/29/2000.

Productivity increased at a 2% annualized rate in the third quarter. Productivity and Costs, Third Quarter 2014, Preliminary


1. Sold 100 IGI at $21.02 (see Disclaimer):

Snapshot of Trade: 

2014 Sold 100 IGI at $21.02

Closing Price Day of Trade 11/6/14: IGI: $20.63 -0.29 (-1.39%)

Snapshot of Profit: 

2014 100 IGI +$75.05

Dividend: I received one monthly dividend payment: 

Total Return: $85.05 or 4.21% (holding period about 3 weeks)

Security Description: The Western Asset Investment Grade Defined Opportunity Trust  (IGI) is an unleveraged closed end fund that invests primarily in investment grade bonds.

Dividends are paid monthly at the current rate of $.10 per share. Distributions for the Months of September, October and November 2014

IGI will be liquidated on or about 12/2/2024. This gives the fund one of the characteristics of owning an individual bond, the promise to pay a specific sum at a future date. Unlike an individual bond, however, there is no promise to pay a fixed sum (i.e. par value). The investor in IGI will receive their pro-rata share of the liquidation proceeds, which may be more or less than the current net asset value per share. 

Prior to May 2013, the fund had been selling mostly at a premium to its net asset value since May 2011. The premium went over 6% at times. The shares have been trading mostly at a 6% to 8% discount to net asset value per share since May 2013, which has brought the 3 and 5 year averages into a slight discount. In other words, the rate spike starting May 1, 2013, which took the ten year treasury from 1.66% that day to 3.04% (Daily Treasury Yield Curve Rates), altered the premium pricing to a persistent range bound discounts to net asset value even as the ten year treasury retreated in yield during 2014. The ten year treasury closed at a 3% yield on 1/2/14 and fallen to a 2.21% yield when I purchased the IGI shares on 10/14/14.

On the day prior to the sell date, I knew that the discount to net asset value per share had narrowed to -3.15%. I consequently entered a limit order before the market opened on 11/16/14 to sell the shares due to that narrowing. 

Data as of Tuesday 11/6/14 (Sell Date):
Net Asset Value Per Share= $21.56 
Market Price= $$20.63 
Discount: -4.31%
Discount at $21.02= -2.57%

CEFConnect Page for IGI

Sponsor's webpage: Individual Investor

As of 9/30/14, the sponsor claims that the "effective duration" was 6.52 years ("portfolio characteristics" tab at sponsor's website).

Last SEC Filed Shareholder Report: Western Asset Investment Grade Defined Opportunity Trust (period ending 5/31/14)(cost of $202.992+M vs. value of $236.210+M-reaping some of those unrealized short and/or long term capital gains can support the dividends without ROC which was the case for the June 2014 distribution: IGI-Distributions-June-August-2014.pdf)

Last Filed SEC Form N-Q (holdings as of of 8/31/14):Western Asset Investment Grade Defined Opportunity Trust Inc. (unrealized profit at $33.8868+M) 

This fund also releases a quarterly report on its financial position. The last quarterly report showed undistributed net income of $.28 per share. Western Asset Investment Grade Defined Opportunity Trust Inc. Announces Financial Position as of August 31, 2014 

Prior Trades: I have repeatedly flipped this one for small gains. Item # 2 Sold 100 IGI at $20.2 (12/31/13 Post)(profit snapshot=$76.56)-Item # 3 Added 100 IGI at $19.28 (10/14/13 Post)

Snapshots of trading profits ($462.07) prior to 2013 can be found in Item # Item # 3 Bought Roth IRA: 100 IGI at $19.43 (9/7/13 Post)

Total Trading Profits=$679.04 including this last trade. 

In order to generate a profit on the shares, I had to trade this security.

Rationale: On my day of purchase, the discount to net asset value was -7.54% based on a $21.74 per share net asset asset value and a  closing market price of $20.1. At my sale's price of $21.02, the discount had narrowed to -2.57%. I will consider selling this bond CEF for a profit when I buy at greater than a 5% discount and the discount narrows by about 5% or more.

The two main risks are interest rate risk and the risks associated with bond CEFs. Some of the interest rate risk is mitigated by the relatively short duration and the fund's 2024 liquidation date.

Future Buys: I am obviously in a trading mode for this bond CEF and will look for an opportunity to buy the shares back. I will need at least a 7%+ discount to net asset value per share before buying again.

Closing Price Last Friday: IGI: 20.58 -0.05 (-0.24%)
Closing Net Asset Value Per Share 11/7/14: $21.62
Discount: -4.81%

2. SOLD  50 PNTA at $25.52 (see Disclaimer):

Snapshot  of Trade:

Snapshot of Profit:

Snapshots of Interest Payments: 

Total Interest Payments: $138.66

Total Return: $163.73 (at least it is a positive number) 

Security Description:  PennantPark Investment Corp. 6.25% Senior Notes due 2025 (PNTA) is an exchange traded baby bond issued by the Business Development Corporation PennantPark Investment.

This is a senior unsecured note that makes quarterly interest payments at 6.25% on a $25 par value. The note matures on 2/21/25. The notes may be redeemed at PennantPark's option at par value plus accrued interest on or after 2/1/16. Final Prospectus Supplement The risk is not that the company will exercise its option to redeem, but that interest rates will rise and the price of this bond will fall significantly at some point prior to maturity.

In the prospectus, the note is described as PennantPark's "direct senior unsecured obligations and rank pari passu with future unsecured unsubordinated indebtedness by PennantPark Investment Corporation.

PennantPark Investment profile page at Reuters

PennantPark Investment  key developments page

Rationale: I have difficulty developing or holding much of an interest in a low yielding bond.

I may use the proceeds to add to my PNNT common position where the yield is substantially higher, provided I could pick up the shares at below $10.5. I may wait until I can review the earnings report which is scheduled for release on 11/12/14.

I currently own 200 shares of PNNT, with a 100 share lot purchased recently. Bought 100 PNNT at $10.66-Regular IRA (10/24/14 Post)

The other lot was purchased earlier this year: Item # 6 Bought 100 PNNT Taxable Account at $10.84 (5/3/14 Post)

I would buy another 100 in a Roth IRA.

If I bought another 100 shares, I would look for an opportunity to sell the 100 share lot held in a taxable account. My last disposition was in December 2013: Item # 5 Sold 50 PNNT at $11.92 (12/17/13 Post)

Closing Prices Today:
PNTA: $25.50 -0.07 (-0.27%)
PNNT: $10.73 +0.10 (+0.94%)

3. Added 200 BHK at $13.31-ROTH IRA (see Disclaimer):

Snapshot of Trade: 
2014 Bought 200 BHK at $13.305
Security Description: BlackRock Core Bond Trust (BHK) is a leveraged bond CEF that is weighted in investment grade bonds, but has a significant exposure to junk rated securities. As noted by the sponsor, the fund will generally have at least 75% of its assets in investment grade bonds.

Data on Date of Trade 11/7/14
Closing Net Asset Value Per Share: $14.87
Market Price: $13.36
Discount -10.15%
Discount at $13.305= -10.52%
Average Discounts
1 Year:  - 9.51%
3 Year: - 5.67%
5 Year:  -6.07%

CEFConnect Page for BHK

Last SEC Filed Shareholder Report (fiscal year ending 8/31/14; holdings start at page 13; net unrealized appreciation $37+M-see page 64; capital loss carryforward $5.935+M-see page 91)

Sponsor's WebsiteCore Bond Trust | BHK (532 holdings as of 10/31/14; 28.32% leverage as of 11/4/14; 100% weighted in USD denominated bonds)

The sponsor states that the effective duration was 9.51 years as of 11/4/2104.

Credit quality is weighted in investment grade bonds with a significant allocation to "A" or better rated bonds.

When I purchased BHK, the fund had a 4 star rating by Morningstar.

Prior Trades: I recently bought 200 shares in a taxable account. Item # 1 Bought 200 BHK at $13.4 (8/23/14 Post) I hope to sell that 200 share for a profit since I am transitioning the position to the ROTH IRA.  

There was a special distribution paid by this fund of $.17 per share in October that was related to its merger with another Blackrock CEF: 

2012 BHK 217+ SHARES +$68.58
I reinvested 17 monthly dividends and realized a profit on all shares purchased with dividends. 

Total Dividends: $224.67
Total Return$293.25 or 10.63% 

Given the nature of this investment, I am content with harvesting the dividends and exiting the position at a profit. An annual total return of 8% would be viewed as good. Eventually, I am going to get caught holding one or more leveraged bond CEFs when there is a non-temporary, quick and significant share price decline.

Dividends: The current monthly dividend is $.0755 per share. BHK Dividend Date & History

Distribution Dates and Amounts Announced for Certain BlackRock Closed-End Funds

The next ex dividend date is 11/12/14

Rationale: I am moving my BHK position from a taxable account to the Roth IRA. I am in no hurry to sell the shares bought in a taxable account, since the proceeds will simply return to a money market fund yielding .01%. The BHK dividends take on the tax characteristics of interest payments made by the bonds owned by the fund and consequently will be taxed at the highest marginal tax rate when owned in a taxable account.

The primary reason for owning a leveraged bond fund now is to generate income. The dividend yield is about 6.81% at a total cost of $13.31 per share.

In the Roth IRA, the BHK's non-qualified dividends become tax free both when paid and when withdrawn.

Even though interests rates have fallen this year, the discount has widened some compared to 12/31/13. The net asset value per share, unadjusted for dividends, has risen to $14.87 per share as of 11/7/14, up 5.46% from $14.1 as of 12/31/13. The discount has widened slightly to -10.52% at my $13.305 purchase price from -8.65% as of 12/31/13.

I view it as an anomaly for a closed end bond fund to increase its net asset value per share by almost 5.5%, unadjusted for monthly dividend payments, and to increase its discount at the same time. The more typical reaction to such a positive net asset value return, particularly in a low interest rate environment, would be to bid up the market price and to narrow the discount. The unusual phenomenon this year described above may be related to the trauma experienced by individual investors in 2013, when the market price declined at a faster rate than net asset value per share when rates were rising causing many natural buyers to leave the playing field altogether.

This kind of fund does provide historically some ballast when stocks tank. The total return for 2008 was -.34% based on price. The ten year annualized total return is decent for a bond fund at 7.46% based on price and 7.16% based on net asset value, both calculated through 11/7/14. Those numbers can be found under the "performance" tab at CEFConnect.

Another advantage of this fund is the weighting in investment grade bonds and the diversity of holdings.

With inflation trending down, interest rate risk is mitigated to some decree though it remains a material risk.

Another positive is the possibility that the discount to net asset value will return close to its 3 and 5 year average near 6% which would create a 4%+ gain in the shares with the net asset value remaining the same and more with an increase in the net asset value per share unadjusted for dividend payments.

Risks: When interest rates rose in 2013, leveraged bond CEFs saw their net asset values decline some as interest rates rose from an abnormally low level to a less abnormally low level.

While that decline was significant for many of them, the decline in the market price was at a faster rate.

When the market price declines at a faster percentage rate than the fall in net asset value per share, the discount to net asset value expands creating an even larger loss in value. A fairly typical result during periods of rising rates is for the market price to decline at nearly twice the rate of the net asset value per share decline. This phenomenon increases the yield, but that kind of decline can also easily wipe out the benefit of the dividend for a year or more.

At CEFConnect, an investor can explore this recent history for a particular CEF by clicking the "Pricing Information" tab and to change the one month history tab back to 5/1/13 when the 10 year treasury closed at a 1.66% yield. I will generally compare that data with 12/31/13 which was near the peak in that last interest rate spike.

BHK Historical Data:
Market Price: $15.06
Net Asset Value Per Share: $15.67
Discount: -3.89%

Market Price: $12.88
Net Asset Value Per Share: $14.1
Discount: -8.65

I can see right away that part of the market price loss was caused by an expansion of the discount from -3.89% to -8.65, more than a doubling.

Unadjusted for the dividends, the net asset value per share declined 10%, which should be a reminder to all investors that bond investing carries risks. The market price decline was greater at 14.48%. That additional loss is what I call a normal CEF risk. It can work both ways which gives investors both more risks than an ETF or a mutual fund investing in the same securities, and potentially greater benefits, depending on what happens to the discount after purchase. It is not a one way street.

At the time of my August 2014 purchase, the discount stood at -10.79% and -10.52% at my purchase last Friday. Ideally, I would want to see that discount shrink now as the net asset value per share drifts up. The less than desirable alternative is for the discount to expand at a greater rate than a decline in net asset value per share.

Interest rate risks is a significant risk at present. With a duration close to 9 years, a slightly more than 1% increase in rates could result in another 10% loss in net asset value per share.

Investor Alert - Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio - FINRA

It would not take much of a rise in rates to wipe out a year's worth of dividends.

This fund's leverage increases the risks. A rise in short term rates will cause the borrowing costs to rise. If intermediate and longer term rates are also rising, then the value of securities bought with that borrowed money would be going down in value. Anyone investing in leveraged bond funds needs to understand that risk which would likely be compounded by an increase in the discount in that scenario of rising short to long term rates.

At the moment, short term rates are near zero and bonds have been doing well so far in 2014. That is an ideal scenario for leveraged bond funds who can generate a higher dividend for their investors due to the spread compared to an unleveraged fund investing in the same securities. Conditions will change, possibly or even probably for the worse. So these funds are not viewed as long term holdings but simply as trading vehicles that produce some income for funds otherwise earnings .01% in a brokerage money market fund.

Future Buys/Sells: I am not likely to buy more. I will certainly consider selling the lot purchased in the Roth IRA when and if I hit an total return of 8%, hopefully within a year. After collecting 12 months of dividends, it would only be necessary to capture a small profit on the shares to achieve that objective.

I will consider selling the 200 shares currently held in a taxable account when I can do so profitably.

Closing Price Today: BHK: $13.36 -0.02 (-0.15%) 

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