we're interested in starting a small position in HBND.
First, can you clarify something.
You said, in reply to a previous question: "But if rates stagnate or decline, and for an investor seeking income, the yield on this ETF may come under pressure, but its unit price can see capital appreciation. "
Are you saying here, that if (for example), the 10 year Treasury were to fall from 4.8ish to 2.4ish, that HBND would then yield around 5%? Along with a capital gain?
Second: would the decrease in HBNDs yield matter that much, as Treasuries and GICs, etc, would have a similar decrease in rates (a 1 year GIC paying around 2.5% vs a current rate of around 5%?
Third: isn't a stagnant yield almost ideal for a covered call bond, as nothing is changing, other than the seller continuing to collect the premiums from the sale of the covered calls?
thanks
Paul L
Typically when the Central Bank announces an interest rate pause, bond investors anticipate the next stage as being interest rate cuts, and thus bond yields begin to decline. If the 10-year Treasury were to fall, HBND would likely still yield 10%+, but some of this yield may come from Return of Capital (RoC), as its covered call positions would get exercised (as bond prices rise), and thus it would need to fund its distribution yield from the invested capital of the fund. The positive side of this scenario would be that its unit price would increase as bond prices rise.
If instead of servicing the 10%+ distribution yield with Return of Capital, the fund simply decreased the yield to 5%, this would still be competitive with other yield products at that time, but it would see much less capital appreciation than owning just a bond ETF (without a covered call option).
Stagnating yields would be ideal for the covered call piece of HBND, but unlike the Central Bank interest rates, bond yields typically do not move sideways for extended periods of time and will either be in an uptrend or downtrend as they attempt to anticipate the future direction of interest rates.