In our last post we looked at divergences across economic indicators and financial markets. In this brief post we look at a key divergence in the CEF market.

To first give some background – CEFs normally trade at a discount which is typically valued using a Z-Score, defined as a standard-deviation of that discount over some time period, normally 1 or 3 years. The Z-Score gives investors a sense of how unusual the current discount is relative to the time period in question.

The second important thing to know is that Z-Scores normally oscillate in relation to the risk appetite in the market. If risk appetite is strong then discounts compress and Z-Scores increase and vice-versa. As one would expect, Z-Scores typically move together with the VIX.

What has happened recently is that Z-Scores have diverged from the VIX.  The VIX has risen as stocks sold off, tensions increased in Syria and North Korea and Trump’s program hit a few snags. Z-Scores, however, have jumped higher.

Part of the reason is that the increase in volatility has been steady and relatively contained (so far). Another reason is that yields have fallen which is typically a boon for leveraged fixed-income funds. Another possibility is that CEFs have repriced higher (reaching a new plateau!) however this feels unlikely to us given the recent path of inflation and the stance of the Fed.

We’ll check back to see how this resolves. Till then,



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