Despite rising interest rates, Moodys Investors Service predicts leverage will remain a net positive for closed-end funds deep into next year.
The report, "The Impact of Leverage on Closed-End Funds: the Winds of Change are Blowing," does acknowledge the risks namely the likely future interest rate increases as the U.S. economy recovers of using leverage.
But the report predicts that the risk will not be as high as it has been during past interest rate increases, mostly because of the structural changes to fixed-income and preferred funds over the last three years.
"In the current interest rate environment, the use of leverage has been beneficial to investors, often enabling them to reap yields in excess of 100 basis points over a comparable non-leveraged fund," said Moody's analyst Barbara Percia, principal author of the report. And according to the report, the benefits should continue.