FTHY: A High-Yield CEF Navigating Rate Hikes with Discipline and Resilience

The search for income in a high-rate world has become increasingly challenging for investors. Traditional fixed-income assets have seen yields rise, but so have risks, particularly for lower-quality bonds. In this environment, high-yield closed-end funds (CEFs) have emerged as compelling alternatives. Among them, the First Trust High Yield Opportunities 2027 Term Fund (FTHY) stands out for its fixed-term structure, attractive yield, and resilience during the Federal Reserve's aggressive 2022–2023 rate-hike cycle. Let's dissect why FTHY could be a strategic addition to a diversified income portfolio.

A Yield That Stands Out

FTHY's 10.22% distribution yield, as of July 21, 2025, is among the most compelling in the high-yield CEF space. This yield, derived from a mix of net investment income, capital gains, and return of capital, reflects the fund's focus on senior, secured floating-rate loans and high-yield corporate debt. The fund's current share price of $14.67 trades at a -1.07% discount to its $15.02 net asset value (NAV), a significant narrowing from its 52-week average discount of -4.18%. This discount, while modest, suggests the market may be beginning to price in the fund's potential for NAV growth as its portfolio adjusts to a higher-rate environment.

Fixed-Term Structure: A Catalyst for Discipline

FTHY's 2027 term creates a natural endpoint, which can drive active management and portfolio optimization. Unlike perpetual CEFs, term funds often prioritize capital preservation and liquidity as the end date approaches, reducing exposure to volatile or illiquid assets. This structure aligns with FTHY's mandate to deliver consistent income while mitigating the risks of prolonged rate hikes. The fund's leverage, currently at 22.13% of its total assets, is managed with care, balancing the potential for enhanced returns against the amplified risks of rising interest costs.

Performance in Rising Rates: A Case Study

FTHY's 2022–2023 performance offers a revealing case study. During the Fed's 525-basis-point rate-hike cycle, the fund recorded a -25.58% total return in 2022, underperforming the Morningstar category average of -15.67% for price returns. However, this volatility was followed by a strong rebound in 2023, with a 14.63% total return—outpacing the category's 15.92% price return and 11.97% NAV return. This resilience can be attributed to FTHY's focus on senior loans, which typically reset interest rates more quickly than fixed-rate bonds, and its active credit selection process, which minimizes exposure to weaker issuers.

Navigating the Risks of Leverage and Credit

While FTHY's leverage and high-yield focus are key drivers of its performance, they also introduce risks. The fund's portfolio includes floating-rate senior loans with interest rate floors, which can limit upside in a rising-rate environment until the floor is surpassed. Additionally, high-yield debt is inherently more sensitive to defaults and economic downturns. FTHY mitigates these risks through rigorous credit analysis and a focus on investment-grade collateral, but investors must remain mindful of the fund's 3.34% expense ratio and the potential for NAV volatility.

A Strategic Case for FTHY

For income-focused investors, FTHY presents a unique opportunity. Its fixed-term structure ensures a clear timeline for portfolio adjustments, while its 10.22% yield offers a competitive edge in a high-rate world. The fund's ability to rebound in 2023, despite the Fed's tightening cycle, demonstrates its adaptability. However, success hinges on patience and a tolerance for short-term volatility. Investors should monitor the fund's discount to NAV and leverage levels, as well as broader economic indicators, to time entry points effectively.

Investment Advice: FTHY is best suited for investors seeking high income with a medium-term horizon. Given its current discount and strong 2023 performance, it may be an attractive buy for those willing to hold through potential short-term jitters. However, diversification remains critical—FTHY should complement, not dominate, a broader fixed-income portfolio.

In a landscape where rising rates complicate income generation, FTHY's disciplined approach, fixed-term structure, and active management position it as a standout option. While risks persist, the fund's track record and strategic advantages make it a compelling play for those seeking yield in a challenging market.