Unlocking Income and Risk-Adjusted Returns in High-Yield Closed-End Funds: The Strategic Case for DHY

The global financial landscape in 2025 is marked by a pivotal shift in monetary policy, driven by a confluence of slowing economic growth, inflationary pressures, and evolving investor demand for yield. As central banks recalibrate their approaches, high-yield closed-end funds (CEFs) have emerged as compelling vehicles for income generation and risk-adjusted returns. Among these, the Credit Suisse High Yield Bond Fund (DHY) stands out as a strategic option for investors seeking to navigate the complexities of today's market.

The Macroeconomic Context: A Tipping Point for Fixed Income

The Federal Reserve's tightening cycle, which peaked at a federal funds rate of 4.25%–4.50%, has begun to yield to a more accommodative stance. Recent data, including a three-month average nonfarm payroll increase of just 35,000—the weakest in five years—has signaled a decelerating labor market. Treasury yields have responded accordingly, with the 10-year benchmark falling to 4.23% as of July 2025, reflecting expectations of rate cuts by year-end. This shift creates a favorable backdrop for high-yield bonds, which offer a compelling combination of elevated yields and relatively strong credit fundamentals.

DHY's Strategic Positioning: Leverage, Diversification, and Yield Optimization

DHY's investment strategy is tailored to capitalize on these dynamics. The fund's portfolio, composed of 78.44% high-yield corporate bonds and 14.70% bank loans, is designed to balance income generation with capital preservation. Its use of leverage—30.61% of total assets—amplifies exposure to high-yield securities, enhancing returns in a rising rate environment while mitigating downside risks through diversified holdings.

Key strengths include:
- Attractive Yield Profile: A 8.73% distribution rate, supported by a 73% payout ratio, reflects sustainable income generation.
- Credit Quality: Despite its focus on speculative-grade bonds, the fund's portfolio exhibits historically low default expectations, with corporate leverage below long-term averages and interest coverage ratios above average.
- Geographic and Sectoral Diversification: 66.18% U.S.-focused exposure, with top holdings in energy, entertainment, and industrial sectors, reduces concentration risk.

Risk-Adjusted Returns: Navigating Volatility and Duration

While high-yield bonds inherently carry higher credit risk, DHY's strategic use of leverage and active management mitigates these concerns. The fund's 58% annual portfolio turnover rate ensures responsiveness to market shifts, while its 3.68% expense ratio, including 2.25% in interest expenses, reflects a cost structure aligned with its leveraged model.

The fund's current -2.29% discount to NAV presents an additional layer of risk but also an opportunity. Historically, CEF discounts have compressed during periods of strong performance, suggesting potential for NAV-driven price appreciation. Moreover, DHY's 12-month total return of 8.86% outperforms its Morningstar category, underscoring its ability to deliver risk-adjusted returns.

Strategic Implications for Investors

For income-focused investors, DHY offers a dual benefit: a high distribution rate and a resilient portfolio structure. The anticipated Federal Reserve rate cuts—projected to bring the fed funds rate to 3%–3.25% by 2026—will likely boost bond prices, amplifying DHY's returns through both income and capital gains. However, investors must remain mindful of leverage volatility and duration risk, particularly in a fast-moving rate environment.

Conclusion: A Strategic Allocation in a Shifting Landscape

In a world where traditional fixed-income assets offer meager yields and equities face valuation challenges, high-yield CEFs like DHY provide a unique value proposition. By combining strategic leverage, active management, and a focus on credit fundamentals, DHY is well-positioned to deliver superior income and risk-adjusted returns. For investors seeking to unlock yield in a slowing economy, DHY represents a compelling addition to a diversified portfolio—provided they monitor macroeconomic signals and adjust exposure as needed.

Investment Advice: Consider allocating a portion of fixed-income portfolios to DHY, particularly for investors with a medium-risk tolerance seeking income. Monitor the fund's discount-to-NAV trend and Fed policy developments to optimize entry and exit points.