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Chairman of the Federal Reserve, Jerome Powell.

AFP/Getty Images/Graeme Jennings/Pool

Barron’s used to publish a bond market piece called Current Yield, which began in the 1970s, when bonds actually had any yield. As the column’s creator, James Grant, memorably joked, they now provide return-free risk, nearly four decades after their peak, when risk-free long-term Treasury bonds topped 15%.

After accounting for inflation, US government securities earn less than nothing. Before accounting for future inflation, the real yield on 10-year Treasury inflation-protected securities, or TIPS, is negative 0.84 percent. The market essentially sets a “break-even” rate of 2.32 percent, which is the predicted inflation rate at which investors would break even between TIPS and a nominal note, with the ordinary, or nominal, 10-year note earning 1.48 percent. As a result, if bond yields rise from their historic lows, bond price losses will outweigh the tiny interest they pay. This is in stark contrast to four decades earlier, when large double-digit interest coupons were used to mitigate the impact of dropping bond prices. Furthermore, throughout the subsequent lengthy secular bull market in bonds, bonds always rallied when stocks declined, making fixed income the ideal hedge for an equity portfolio. That symbiotic relationship will be shattered if interest rates rise in tandem with inflation in the future, making the classic 60/40 stock/bond portfolio combination less foolproof, as this column has previously explored. Given that Treasuries give no actual yield and that riskier fixed-income sectors like corporate bonds, mortgage-backed securities, and municipals offer the tiniest additional boost of return ever, Mark Grant comes to the same conclusion as Jim (no relation, however). B. Riley Securities’ senior global fixed income analyst recommends investors to sell their bonds outright, regardless of their absolute or relative value. This comprises bonds that have made significant profits and are now trading at significant premiums as a result of being purchased at a time when rates were significantly higher. Those premiums will surely narrow if the bond matures at par or is called before maturity at a minor premium above par, especially in the case of munis. Mark Grant advises that it is better to sell now and profit. He argues that this is true even if the investor would owe capital gains taxes. The challenge then becomes where to put that money. Other investments are not encouraged by GMO’s latest seven-year projection for several asset classes. “By practically any measure we can come up with—backward or ahead looking—the valuations of US stocks are at levels that alarm us,” says Peter Chiappinelli of the GMO asset-allocation team. These high current valuations translate into minus 7.8% annual real inflation-adjusted returns for large U.S. equities and negative 8.4% for small U.S. stocks in the future. According to GMO, only emerging market value stocks are expected to generate a positive real annual return of 2.7 percent, which is less than half of the historical 6.5 percent real return from U.S. equities.

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To match the past real return of US equities, a nominal return of 9% would be required, assuming the Federal Reserve achieves its goal of allowing inflation to remain modestly above its previous target of 2% for a period of time. In today’s markets, that’s all but impossible. Closed-end funds, which Mark Grant has been suggesting to his institutional clients who have traditionally avoided the sector, are the only investment that generates current income anything near that level. However, he believes that some CEFs are well-suited to individual investors wanting substantial current income, such as retirees, in order to pay bills and maintain their lifestyles. Grant can’t disclose names because to regulatory restrictions, but he focuses on CEFs and a few exchange-traded funds with yields in the double digits, owing to their leverage. Leverage raises profits by allowing you to borrow money at a lower rate and invest the proceeds at a higher rate, but it also increases risks. Some CEFs use a different strategy to produce current income: a dividend-paying stock portfolio. Some people will use leverage to increase their income, while others will sell options against their stocks and use the premium to earn current income. We looked for equity-based CEFs that trade at a discount to their net asset value and offer current yields of more than 9%. Clough Capital Partners has two leveraged funds:

Clough Global Equity is a private equity firm based in the United

(GLQ), which closed Thursday with a 7.76 percent discount and a yield of 10.84 percent, and

Clough Global Dividends & Income is a company that specializes in dividends and income.

(GLV), with a discount of 6.99 percent and a yield of 10.76 percent. The latter has a well-balanced stock and bond portfolio, whereas the former is equity-based. Options writing is used in two CEFs.

High Dividend Equity Income from Voya Asia Pacific

(IAE), which is currently trading at a 6.92 percent discount and earning 9.13 percent,

Hedged Equity & Income by John Hancock

Wellington Management’s (HEQ) is currently trading at a 3.59 percent discount and yields 9.01 percent. These equity CEFs’ key draws are income, income, and income, in that order. They don’t even come close to matching the 41.89 percent total return of the stock during a 12-month period.

S&P 500 SPDR

Morningstar research shows that the ETF (SPY) is a good investment. They weren’t exempt from swoons amid the market’s heavy selloffs in early 2020, as the virus spread. However, if you’re looking for income, which is woefully lacking in bonds, these CEFs may be able to help. Continue reading Infrastructure Gets Its Week, Up and Down Wall Street. Inflation and joblessness, on the other hand, have not vanished. Randall W. Forsyth may be reached at randall.forsyth@barrons.com.
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