How does the Fund balance the factors that affect the dividend?
Income, leverage cost and hedging cost create a three-legged dividend stool, and each leg can move up or down for different or similar reasons. Trying to forecast changes in one leg is difficult enough, let alone three. Consequently, projecting a dividend amount is a mixture of art and science, and becomes more difficult the further out in time we look. Having said that, we can make some general observations about how the legs of the stool relate to one another. We already noted that falling long-term interest rates and rising short-term interest rates tend to lower income. At the same time, a flatter yield curve (i.e. a smaller difference between long and short rates) lowers the cost of hedging, potentially improving returns going forward. Conversely, rising long-term and short-term interest rates tend to increase income and, at the same time, increase the cost of the Fund’s leverage. Whether the cost of hedging changes depends on how long-term and short-term interest rates move relat
