PCM - EVV: This Bond Fund Has More Risks Than One Might Think

2025-03-30 09:24:04 ET

Summary

• The Eaton Vance Limited Duration Income Fund offers an 8.83% yield, higher than most investment-grade bonds, but its heavy reliance on junk bonds poses recession risks.
• The fund's leverage ratio of 40.40% is higher than its peers, increasing risk, especially if the U.S. enters a recession.
• The fund appears to be struggling to cover its distributions, despite the recent cuts.
• Despite recent distribution cuts, the fund's current yield still outperforms inflation, although its long-term performance is only median among peers.
• Trading at a 3.28% discount to NAV, the fund is relatively expensive compared to its historical average and peer group, suggesting caution.

The Eaton Vance Limited Duration Income Fund ( EVV ) is a closed-end fund that provides a method through which investors can obtain a fairly high level of income from the assets that they already possess. As is the case with many income-oriented funds, particularly ones that mention anything about duration in their names, this one aims to achieve its goals by investing its assets in a portfolio of fixed-income securities. For the most part, fixed-income assets have done fairly well this year, especially when compared to common stocks. We can see this quite clearly in this chart:

As we can see here, the Bloomberg U.S. Aggregate Bond Index ( AGG ) has risen by 1.89% year-to-date, while the Bloomberg High Yield Very Liquid Index ( JNK ) has declined by 0.27% since the start of the year. While the decline in junk bonds is certainly disappointing, both types of bonds did substantially better than the 5.11% decline of the S&P 500 Index ( SP500 ) over the same period.

One of the reasons for the outperformance of bonds is that there have been some predictions that the United States will enter into a recession later this year. Earlier this week, CNBC stated that 60% of corporate chief financial officers surveyed expect that the United States will be in a recession sometime during the second half of this year. The survey goes on to state that at least 85% of chief financial officers surveyed expect that the country will experience a recession between now and the end of 2026. Admittedly, this is just “soft data,” and as I stated in a recent article, there appears to be a growing disconnect between “soft data” and “hard data.” Soft data typically comes in the form of surveys, interviews, and other things that depend heavily on people’s opinions about the future. Hard data takes the form of things such as factory orders, business investment, and actual numbers that show what economic activity is taking place. For the past few months, the soft data has been increasingly pointing to a recession while the hard data says otherwise. It is possible that there is a political bias in the soft data, but this is not certain. Regardless, the market itself, at least in the short term, can be swayed heavily by the opinions of pundits, business leaders, and others, and as such, we should not ignore any data....

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