Published: May 19, 2010

I'm not a pack rat, but I saved the October 6, 2008, issue of The New Yorker magazine.

Only weeks earlier, the investment bank Lehman Brothers had failed and the markets were spiraling downward. As always, the magazine had its signature cartoons that perfectly captured the times. In this issue there were a number that summed up the dour sentiment of investors.

In one cartoon, a man walks into his bedroom to discover his wife cheating on him. The caption reads: "Not on the mattress where we keep all our money!"

During the market downturn, one enterprising company even released a product called "The Mattress Wallet." Fashioned like a miniature mattress, the wallet was marketed with tongue-and-cheek campaigns, designed to connect with concerned investors. In one ad, the "M.R.O.R" (mattress rate of return) of 0% was shown to be superior to the market's double-digit decline.

As the market continued to slide, investors' money piled up on the sidelines. And when the government announced it would temporarily guarantee money market funds, the cash rolled in. True, the yield on money market funds had fallen to less than 1% by December 2008 -- only marginally better than a mattress.

But the trend to "take to the mattresses" began to slowly unwind over the course of the market's subsequent rally. The mattresses -- and the money market accounts -- have been raided to fund better-yielding investments.

In March 2010, U.S. investors withdrew $148.2 billion from money market accounts -- much of it making its way into the bond market.

The investment research company Morningstar reported that 75% of the inflows into mutual funds in March went into bond funds. High-yield bond sales in the first quarter of 2010 were $61 billion -- the highest since 1980, when the sales were first tracked.

While this has been great news for existing bond holders, new investors are having a tougher time finding good bond yields at a reasonable price. This is especially true in the universe of closed-end bond funds. Only a few months ago, investors could buy into a closed-end bond fund for less than the net asset value (NAV) of its portfolio. Now that the "mattress rally" is in full swing, those bargains are far fewer today.

In fact, a number of closed-end bond funds are trading at premiums. Buying a fund at a premium isn't always a bad thing. Some funds normally trade at a premium. And for that matter, some funds normally trade at a discount. But we're starting to see the prices of many closed-end funds trade above their historic range -- at narrower discounts or higher premiums -- than they have during the past few years.

As an example, I've graphed the price premium/discount for the Western Asset High Income Fund (NYSE: HIF) over the last five years.

This recent trend of rising premiums introduces a little more price risk for closed-end bond funds. And it's something we need to be aware of. For instance, should these premiums start to erode back toward their normal range -- as they could if interest rates rise -- share prices could drop.

One of the things I always check when I'm researching a closed-end fund for my Daily Paycheck newsletter is its historic premium/discount range. I highly recommend CEFConnect as a source for this data. It is a free website that's easy to use.

I can say that there's one good thing from the market's recent swoon: some of the premiums are beginning to close. While there are still a number of funds trading above their net asset value, I am keeping my eyes open for opportunities.

-- Amy Calistri
Editor
High-Yield Investing
High-Yield International