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No. of Recommendations: 3

You wrote, Some of the funds might be leveraged.

When I was investigating bond CEFs to purchase back in 2008/2009, I found that almost all were leveraged - usually by 25%. This exaggerates the effect of interest rate swings and does a double-whammy on them.

This was actually a desirable trait at the time since I was trying to catch them near the bottom. I'm not sure I want to buy into them this close to a top. But fear of rate changes can produce leading discounts on these types of issues that are over-blown, so I'm not saying CEFs aren't worth considering - just to be careful.

BTW, an additional risk is that CEF bond leverage is short-term while the bonds held by the CEF are usually long-term. So it seems to me that rising short-term rates puts a squeeze on CEF and reduces the effectiveness of the leverage.

Also in a credit-averse market (like 2008), you run the additional risk that the CEF may be forced to liquidate bonds at the worst-possible time if they are unable to refinance their short-term debt. For me, this meant the CEF needed to be trading at a significant discount relative to an already depressed NAV; but still be backed by a strong issuer.

- Joel
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