PDO - PDO CEF: My 2023 Dividend Lesson
2024-04-28 04:16:13 ET
Summary
- PIMCO Dynamic Income Opportunities Fund offers a 12% dividend yield.
- I see a very similar set of macroeconomic conditions and risks associated with PDO now compared to mid-2023.
- A key lesson I learned then is that the yield won’t be sufficient to compensate for the risks, and PDO can suffer a large negative total return.
- The fund has a large exposure to mortgage-related assets, which could be risky given the current yield spread.
- The yield spread between long-term and short-term rates may become more negative, putting pressure on such assets' profitability and valuation.
PDO CEF’s 12% dividend yield
The PIMCO Dynamic Income Opportunities Fund ( PDO ) is a relatively new addition to the PIMCO fund family. I’ve written two articles in the past to introduce this new member. In this article, I want to draw your attention to the first one I wrote back in May 2023 (see the chart below) because I am seeing a similar set of conditions currently. I was concerned about two specific risks: the inverted yield curve and the spread between the BAA and Treasury rates. Quote:
PDO CEF: My 2023 Dividend Lesson
… the current yield spread between the 10-year Treasury Constant Maturity rates and 2-year Treasury Constant Maturity rates is -0.52%. To contextualize it, it is the deepest level of inversion in the past 3 decades. Even the 2000 episode did not reach this level.
… the current yield spread between high-yield corporate bonds and risk-free interest rates is also on the thin end of the spectrum.