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PFN: Still Pricey, But Still A Reasonable Option For High Yield

Published Thu, 15 Oct 2020 15:56:15 -0400 on Seeking Alpha

Seeking AlphaClosed End FundsPFN: Still Pricey, But Still A Reasonable Option For High YieldOct. 15, 2020 3:56 PM ET|| About: Pimco Income Strategy Fund II (PFN)by: Dividend SeekerDividend Seeker ETF investing, Dividend Investing, long-term horizon, ValueSummaryPFN has performed well over the summer months, and risk-on assets continue to pique investor interest.
The fund's premium continues to make me cautious, as does recent UNII figures that are not very encouraging.
High yield bonds remain an area for the bold. However, a large percentage of new issuance has been used for refinancing, putting the issuers in stronger financial positions.
Main Thesis
The purpose of this article is to evaluate the PIMCO Income Strategy Fund II (PFN) as an investment option. PFN is a fund I tend to favor for high yield exposure, but this is a sector I have been avoiding for the most part in 2020. That said, PFN has been delivering impressive gains over the past few months, as investors have piled into riskier assets. Looking ahead, this trend could certainly continue, as interest rates remain low, economies are opening back up, and worries over post-election volatility have been on the decline. However, I still view this environment cautiously, making me reluctant to place a buy rating on PFN. Yes, volatility has declined, but perhaps by too much considering all the risks facing the country. Further, PFN trades at a premium price, which makes new positions now quite risky. While the fund has a history of trading at a premium, it has also shown it can lose a lot of value when conditions deteriorate. Finally, the high yield bond sector has seen some improvement, with many companies issuing new bonds to pay off existing ones, improving their capital structure. However, defaults have been on the rise, and the market has shown high yield will sell-off quickly if the tide turns.
First, a little about PFN. The fund's objective is "to seek high current income,... Read more