Matt Freund, Co-Chief Investment Officer at Calamos Investments, expects the Federal Reserve to make “a couple of cuts this year, followed by two or three cuts next year,” and that those moves will be made while inflation stays at current levels or rise slightly. With those cuts, Freund thinks there will be a steepening yield curve, around 3 percent, creating more opportunities. Freund, whose team manages the Calamos Closed End Fund Income & Arbitrage ETF, says that the yield curve changes would bring borrowing costs down and “present a nice springboard” for closed-end funds, particularly among muni funds, the managed limited partnership space and funds with exposure to natural gas and small caps.
CHUCK JAFFE: Matt Freund, co-chief investment officer at Calamos Investments is here, we’re talking about interest rates, markets, and how closed-end funds are performing through it all, this is The NAVigator. Welcome to The NAVigator, where we talk about all-weather active investing and plotting a course to financial success with the help of closed-end funds. The NAVigator is brought to you by the Active Investment Company Alliance, a unique industry organization representing the full spectrum of the closed-end fund business from users and investors to fund sponsors and creators. If you’re looking for excellence beyond indexing, The NAVigator will point you in the right direction. And today we’re looking at the market and the economy with somebody who actually goes from that investor side to also the fund sponsor and creator side, because Matt Freund is co-chief investment officer at Calamos Investments, which has a wide range of funds, including of course, closed-end funds. But before this conversation is done, we’re going to be talking about the Calamos Closed-End Fund Income & Arbitrage ETF, that’s CCEF, which makes them an investor in closed-end funds. If you want to learn more about the firm and what they do, and about their fund offerings, go to Calamos.com. And if you want to learn more generally about closed-end funds, interval funds, and business-development companies, check out AICAlliance.org, that’s the website for the Active Investment Company Alliance. Matt Freund, welcome back to The NAVigator.
MATT FREUND: It’s my pleasure being here.
CHUCK JAFFE: Let’s start in general with interest rates because, well, so much of closed-end fund activity revolves around bonds, fixed income, Treasuries and the rest, munis, et cetera. So we’ve been waiting for a rate cut, but even when we got rate cuts last year, the market didn’t really perform the way we expected, so when and where do you think the rate cuts are happening? But when they happen, are we going to see the impact or has the impact already been priced in?
MATT FREUND: Well, a lot of the impact has been priced in, so I think the answer to your question, we’ll hit it concisely at the start, is that we’re going to be seeing a couple of cuts this year, followed by two or three cuts next year. So I would expect when we’re talking again next summer, that rates are going to be 100 to 150 basis points lower, within that range. My guess is that it’ll be closer to 100, but again a lot’s going to depend on data that comes out between now and then. But the question you asked I think is really important, what’s the reaction going to be? So last August I was wrong, I thought the Fed was going to cut 25, and they cut 50, and the market didn’t like it, and by the market, I mean, the bond market. Because the long end of the curve, call it 10s, 20s, and 30s, even though the Fed cut rates, the long end of the curve had rates going up, so the curve got steeper and that was I think a vote of the Treasury market saying, “You’re going a little bit too aggressively.” I think this time they’re very aware of it, once they start, I don’t expect a 50. I know that’s been in the press over the last day or two, but I think they really want to reassure the long end of the curve, they don’t want to do anything to disrupt the Treasury buyer.
CHUCK JAFFE: You don’t expect the 50. Just out of curiosity, do you think that they’re cutting it the next meeting, or are they going to wait absolutely as long as they can, get one more month of that data in to say, “Okay, now we really are seeing the inflation that we think we’re seeing and now let’s make it”?
MATT FREUND: Yeah, so I would bet that they would cut in September. I think the wildcards for that, we had a PPI reading today that was on the high side, but the CPI reading we had two days ago was fairly well contained, and it’s our forecast that inflation is going to stay at current levels or trend up a little bit over the next couple of readings. So the inflation backdrop isn’t going to help, but we’re getting a lot of certainty, we’re getting certainty certainly on the fiscal side, the Big Beautiful Bill is now law, we’re getting more certainty around tariffs and what that’s going to look like, and we’re seeing the impact of that. Putting it all together, I think there’s a pretty strong case to start cutting, but to do it in a very measured and deliberate way.
CHUCK JAFFE: One hundred and fifty basis points in a foreseeable period of time, that’s something that managers, traditional managers, closed-end fund managers, et cetera, will react to. How do you see the market responding? And from a closed-end fund perspective, do you start to do bargain hunting because rates going down, discounts tend to expand or what have you?
MATT FREUND: Let’s do the bond market first. Credit spreads are very, very tight, in some cases at all-times tight, so can that continue? And the answer is it can, but I think that we’re really at the low end of the range, I wouldn’t expect to see credit spreads come in a lot. In terms of the Treasury curve overall, if they are very deliberate, if they’re doing it from a position of strength, meaning inflation is low enough and they have enough certain policy, uncertainty has gone away, that they can cut rates, I think that would be perceived pretty well by the long end. Now on the other side, if they’re seen as capitulating to the administration, if they’re seen as doing things for non-monetary reasons, that could cause trouble, but I don’t think that’s going to be in the cards. So my base case is that the Fed will cut in a very methodical way, that the long end of the curve, again, could it go to 475? Sure, I think that’s kind of a long-time fair value, but we’re going to have a nice, gentle curve, where you have rates around 3% by next summer, and you’re going to have the long end, 4.25-4.5%, and that is a very supportive environment for credit spreads and risk assets. And then on the equity side, I do a little bit of work there too, helping out some of the teams, the large cap growth names, they have fortressed balance sheets, they’re really not trading based on interest rate expectations, but the cyclicals are, some of the small cap names that have a lot of floating rate debt are, and I think that you’re going to see those get some positive impacts if the Fed were to cut rates. And certainly we can see it in housing is I think a case in point, that if they can reduce the front end without the long end getting out of control, there’s a lot of pent up demand in the housing space that’s going to be unleashed.
CHUCK JAFFE: Is that changing where you’re looking on the equity side?
MATT FREUND: Well, we do expect there to be a broadening in the equity market. It’s difficult right now because there really are just a handful of stocks, it’s not just the Mag 7, but it’s not a huge list beyond that that are driving all of the performance, which makes sense when you realize that they’re driving all of the cash flow and earnings growth as well. But we do expect that to broaden out, and actually I’ve been surprised that it hasn’t broadened out more already, but we are seeing that healthcare seems to be hammering out a bottom and starting to regain its footing. I’m not a technician, but the research that we get shows that places like industrials and financials and small caps also are gaining some relative strength there. So I do think a broadening is in the cards, but the key is going to be that those interest rate cuts are very deliberate, they’re done from a position of strength, and they don’t do enough to spook the long end of the curve. And certainly we’ve got the tariff uncertainty too, again there’s an assumption there that that’s going to continue on the path, not for the first two weeks of April, but what we’ve seen since then.
CHUCK JAFFE: The broadening that you mentioned, will that extend all the way to small caps or is it not going to get quite that far?
MATT FREUND: No, I think there’s a lot of reasons to think that it would. I think that if you look at broad asset classes, small caps relative to large, earlier in the year they were as cheap as they’ve ever been. We have a very talented small cap team, it’s our Calamos Timpani team up in Milwaukee, and they do a great job. Again, the opportunity set that they’re seeing, they’re very excited about, and that makes sense, because when all of the focus is on that Mag 7, plus call it another half dozen or so, that’s where all the action is, there are going to be overlooked opportunities, especially when those areas are exhausted. We don’t think they’re there yet, but we’re worried about it and watching, meaning the Mag 7.
CHUCK JAFFE: Let’s bring this over to the closed-end fund space, where the Calamos Closed-End Fund Income & Arbitrage Fund is a fairly new fund, it opened in 2024, so you don’t quite have two full calendar years at this point. Year to date it’s up about 9% at a time when the stock market is up about 10%, but it’s doing it with a very different kind of portfolio, so what are the opportunities you see in closed-end funds at this point, and how much of it is just simple discount narrowing?
MATT FREUND: A couple of things. So the fund has been around for about two years, as you said, we were running it as a SMA before that for a little over a year, and we were running it in simulated form for about 18 months before that, so we have a live track record going back further, and really the history here is Calamos has a long tradition in the closed-end fund space. It gave us great insights, and again, we’re not only operating closed-end funds but looking at it from the investor lens, so we think that gives us a leg up. Our philosophy there is twofold. First, our investors want income, so it is designed to have a heavy distribution yield, but really we’re looking at two things. The first thing we’re looking at are opportunities where the baby’s been thrown out with the bathwater, where the discounts we think are unjustifiably wide, and so part of the investment thesis there is that sectors are out of favor relative to themselves and relative to the other opportunities in the marketplace. The other thing we look at is income, but this is really important because it’s not just income, it’s return of capital adjusted income. So what does that mean? So in the closed-end space, fund companies can distribute more than they earn, and it can be constructive, meaning I have a lot of NVIDIA, I don’t want to sell it, I will have a distribution that is covered by unrealized capital gains, so your net asset value is gradually increasing, you’re returning some capital in lieu of realizing a gain. That’s fine, but other companies can have destructive returns of capital, where they’re giving you your own money back in the form of yield, so we adjust for that. It takes some work, we do it each time, every time, and make sure that the ROC-adjusted yield that we receive is attractive. So when we look at the marketplace, we have gotten a nice return from having those discounts close, but we’ve also gotten a nice return on a ROC-adjusted basis, meaning from earnings and realized gains, not from returns of capital. So we do those two adjustments and find that it wins for us over time.
CHUCK JAFFE: We’ve got a market that’s at record highs, are you liking the general discount picture out there? Is there a lot to choose from as you’re building it?
MATT FREUND: So discounts have come in for sure, and the pattern that we see, it’s the same pattern of fear and greed that when investors run for the exists, they’re less discriminating about the price that they pay, they want to get out and get out now, and it’ll create discount opportunities. So April, things were a lot wider than they are today, when the markets are up and investors are relatively happy, they’re not selling, and the natural result is that discounts close. That being said, right now our discount is on average between 7-8%, so again it’s tighter than it was, but we still think that’s attractive when you look out at what’s available in the market. And our yield, so again, getting to the ROC-adjustments, after adjusting for our return of capital, our ROC-adjusted yield is almost 7.5%. So we like the yield backdrop in what we’re doing, we like where the discounts are, though to your point they’ve been wider. And then the last thing that I would throw in there, we were talking about rate cuts, I do think there could be a growing opportunity in the muni bond, in the fixed-income space broadly, so you have to look at the forms of leverage that closed-end funds will implement, and again we spend a lot of time doing that. If you’re borrowing on the short end of the curve and investing in the long end of the curve, given the inversion that’s going on, that’s not a great setup. I do think that a steepening curve where the front end comes down and the cost of borrowing for closed-end funds comes down, could present a nice springboard in certain of those funds. So we’re looking there, we still like the MLP space, that hasn’t done as well for us recently, it’s still positive, it hasn’t kept up with the broader market but we think there’s opportunities there. We think especially with some of the AI buildouts that’s going on, that natural gas is definitely going to be a part of it, and that those funds will benefit as a result.
CHUCK JAFFE: Matt, really interesting stuff. I appreciate your time joining us on The NAVigator, we’ll talk to you again down the line.
MATT FREUND: Looking forward to it.
CHUCK JAFFE: The NAVigator is a joint production of the Active Investment Company Alliance and Money Life with Chuck Jaffe, and yeah, I am Chuck Jaffe, I’d love it if you’d check out my show on your favorite podcast app or by going to MoneyLifeShow.com. Now to learn about closed-end funds, interval funds, and business-development companies go to AICAlliance.org, that’s the website for the Active Investment Company Alliance. Thanks to my guest Matt Freund, he’s co-chief investment officer at Calamos Investments, you can learn about the firm and its funds, its closed-end funds but also the Calamos Closed-End Fund Income & Arbitrage ETF which we were discussing, by going to Calamos.com. The NAVigator podcast has something new for you every Friday, make sure you never miss an episode by subscribing or following along on your favorite podcast app, and if you liked this podcast, leave a review and tell your friends, because that stuff helps. Until next week, happy investing, everybody.
Recorded on August 15th, 2025
