PCI: Tough Breaks

The PIMCO taxable CEFs are the rockstars of the income world. However, it’s important to recognize that there are some nuances that investors need to be aware of.

First, let’s take a look at what’s happened since the start of August where the PIMCO Dynamic Credit and Mortgage Income Fund (PCI) and its sister fund PIMCO Dynamic Income Fund (PDI) are lagging the rest of the taxable suite. Normally, you would expect funds with the highest leverage to outperform in an environment of stable / rising underlying asset valuations.

The reason why PCI and PDI are lagging has to do with their muted swap yield curve steepener exposure – a fund like PHK has more than 5x the exposure to yield curve steepening in relative terms which is precisely why it has outperformed.

Let’s zoom out and bit and take a longer-term perspective. From the end of February PCI is also lagging the rest of the suite and this is despite the yield curve being flatter than it was then. What gives?

Well, the reason for the underperformance since February was that PCI was forced to deleverage the most across the suite, locking in permanent capital losses and making it more difficult for the fund to recover.

Tough breaks.

Thanks for reading.

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