How does the slope of the yield curve impact the cost of the Funds hedging strategy?
An inverted yield curve, where short-term rates are above long-term rates, would affect each Fund in three ways, and the net impact could be either positive or adverse depending upon the interaction of those three factors. First, an inverted yield curve would increase the cost of the Fund’s leverage relative to the return the Fund earns on long-maturity assets. In fact, if the yield curve were to invert by a large amount, it’s possible that the leverage costs could exceed the current return on the debt and preferred securities in the Fund’s portfolio. These higher leverage costs would reduce the incremental return earned on the roughly one-third of the portfolio that is financed by the Fund’s leverage.
