Weekly Review Highlight: Loan CEF Valuations Lowering as Interest Rates Dip
**Hey there! Let's dive into this week's CEF Market Weekly Review, where we discuss closed-end fund (CEF) market activity, focusing on individual fund news and broader market trends. We aim to offer insights from both a micro and macro perspective, keeping you informed about what's driving the markets and what you, as an investor, should be aware of.
This update covers the period up to the first week of June. It's worth checking out our other weekly updates covering business development companies (BDC), preferreds/baby bond markets for a comprehensive view of the broader income space.
Market Action
CEFs had a strong week, with equity-linked sectors leading the charge due to the ongoing strength in stocks. However, municipal sectors have underperformed in the year-to-date, as longer-term rates have risen. It's interesting to note that CEF valuations continue to become richer, with the median CEF sector discount trading around 2% tighter than its long-term average level.
Market Themes
Loan CEF valuations are gradually losing ground to the broader CEF sector. This can be attributed to the decline in short-term rates, which, in turn, has led to distribution cuts in the loan CEF sector. We predicted this shift earlier when the Federal Reserve hiked rates in 2022.
This rate increase boosted loan CEF incomes, resulting in distribution hikes. Consequently, loan CEF discounts outperformed the broader market in mid-2022 and even narrowed the gap with the average CEF discount around Q3 of 2023. However, once the Federal Reserve started to cut rates in 2023, we expected loan valuations to underperform the rest of the CEF market.
This trend is indeed apparent. The latest chart shows that loan CEF discounts (blue line) were trading substantially wider of the CEF sector average (orange line) in 2022 when the Fed started to hike the policy rate. As the Fed rate hikes filtered through, loan CEF valuations outperformed the broader CEF market. But once the Fed initiated the cut, loan CEF valuations started to underperform.
Market Commentary
In CEF distribution news, Nuveen funds NPCT and NMAI trimmed their distributions by about a tenth, and NMAI also moved from a quarterly to monthly distributions – a trend we've been observing over the last few years to cater to retail investors' preferences.
BlackRock made minor adjustments to their managed distribution funds BSTZ, BTX, BMEZ, BCAT, and ECAT. Eaton Vance made incremental changes for EVR, EFT, EVV, and EVG, with the last two seeing slight increases. Invesco, John Hancock, Guggenheim, and PIMCO saw no changes.
Loan/CLO Equity CEF (XFLT) held its regular quarterly update. Management attributed the drop in income and subsequent distribution cut to spread compression. They mentioned that loan spreads tightened almost 0.3% over 2024 and an additional 0.1% in the early part of 2025. This puts loan spreads at post-Global Financial Crisis (GFC) lows. An imbalance in loan supply and demand, coupled with positive market sentiment (despite the movement in April), contributed to spread compression. Overall, the fund is still an attractive choice for holding some CLO Equity exposure because of its relatively low fee structure and the sector's lowest leverage cost.
Stance and Takeaways
Distribution cuts in the loan sector have caused some volatility in a number of funds, such as EIC and, to a less significant extent, XFLT. Investors who are unhappy with recent distribution cuts are offloading their positions, creating appealing entry points for others. Both funds remain attractive holdings in the CLO CEF sector due to their relatively low management fees, high-income levels, and strong historic returns.
Don't forget to explore our Systematic Income service and discover our Income Portfolios, engineered with both yield and risk management considerations. Check out our powerful Interactive Investor Tools to navigate the BDC, CEF, OEF, preferred, and baby bond markets.
Take a look at our Investor Guides: on CEFs, Preferreds, and PIMCO CEFs. Sign up for our 2-week free trial to check us out on a no-risk basis! Stay tuned for more updates on the exciting world of CEFs. 🚀📈✨
- In the context of CEF Market Weekly Review, interested investors should consider exploring the effects of distribution cuts in the loan sector, such as with funds like EIC and XFLT, and consider them as attractive holdings in the CLO CEF sector due to their low management fees, high-income levels, and strong historical returns.
- For those seeking comprehensive insights into both income-generating investments and broader market trends, it's advisable to review our other weekly updates covering business development companies (BDC), preferreds/baby bond markets to gain a comprehensive view of the broader income space and make informed investing decisions in finance.
