PDI - PDI: 3 Important Risk Factors To Consider Before Going Long

2023-05-07 02:55:53 ET

Summary

• Since the change in FED's policy stance, PDI has underperformed the overall market by ~52% on a total return basis. The price divergence and ~14.5% yield theoretically make PDI attractive.
• However, high yield implies high risk. There are three elements that are not that straightforward and that should be considered by current and prospective investors.
• PDI's massive exposure to non-agency MBS shows early signs of increased credit risk - both from the probability of default and loss given default perspective.
• PDI's exposure to high-yield credit faces not only systematic headwinds but also several idiosyncratic risks.
• The presence of external leverage magnifies the potential losses, and the underlying structure of it introduces additional points of caution.

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