“Don’t fight the Fed” is my top investing rule—but what the heck do we do when Jay Powell says one thing and then does another?
We buy bonds! Below we’ll dive into a bond fund kicking out a sweet 9% yield and sending payouts our way every month.
But first, let’s get to the heart of the Fed chief’s doublespeak.
Did you watch Powell’s press conference last week?
If you’re like me, you probably weren’t surprised by most of it. He did his usual tough-guy talk on rates. But then, almost as an aside, he said the Fed is slowing its campaign to shrink its balance sheet—known as “quantitative tightening.”
That’s a big deal—and a key driver for our 9% dividend opportunity. Here’s why.
Every month since June 2022, the Fed has been letting billions of dollars’ worth of notes, bonds and mortgage-backed securities run off its balance sheet. But starting in June, Powell says the Fed will slash the amount of Treasuries it allows to mature by more than half, to $25 billion worth from $60 billion.
In other words, the Fed will buy Treasuries to replace those that mature above the $25-billion cap. It’s an under-the-table play to throw a leash on the “long” end of the yield curve. That would be the rate on the 10-year Treasury, after it hit 5% in October and sent first-level investors into a panic!
As the Fed steps in, it will push bond prices up, and yields down. It’s the return of QT’s evil twin: quantitative easing—and it’s why stocks spiked after Powell’s comments.
It’s a clear case of Jay saying one thing out loud … and whispering something completely different in our ears!
This isn’t the first time, either. Remember March 2023? Silicon Valley Bank had just crumbled to dust, and more banks were wobbling.
The Fed chief pulled the same trick, talking tough on rates while, through the back door, pumping money into the system. The spigots have been stuck in the “open” position ever since, as you can see in this chart of bank reserves:
What’s happened since? Stocks—especially by AI stocks—have rocketed to the moon.
At my Contrarian Income Report service, we love to play Jay’s Quiet QE habit. In May 2023, when banking fears were still rampant, we grabbed the 14.6%-yielding (at the time) PIMCO Dynamic Income Fund (PDI). PIMCO, of course, was founded by Bill Gross, who essentially invented bond trading back in the ’70s.
Today, PDI is run by Gross’s successor, Dan Ivascyn, dubbed “the Beast” by his colleagues for his long record of success. We’ve gone on to book a nice 20% total return on PDI, with almost all of that in dividends, in the year since we bought it.
That’s a big move for a bond fund. And now, as Powell tries to grab the handle on Treasury yields (and they remain below the 5% peak we saw back in October, despite recent inflation worries), we’re nicely set up to buy more bonds here.
That’s because if Treasury yields put in a “lower high”—as I expect, thanks to Powell’s intervention and a slower economy and labor market—it will be wildly bullish for bonds.
Of course, we’re not buying 10-year Treasuries—even at a 4.5% yield, they just don’t pay enough. And now, with a 12.3% premium to net asset value (NAV, or the value of its portfolio), PDI isn’t among my top stops for new money, either, which is why it’s currently rated a hold in Contrarian Income Report.
Instead, consider the DoubleLine Yield Opportunities Fund (DLY), which trades at a 3% discount to NAV today while yielding 9.1%. Moreover, its monthly payout has held steady since its launch in early 2020.
That’s right: through rock-bottom rates, soaring rates, quantitative easing, quantitative tightening … and now Jay’s “Quiet QE,” this rich dividend has simply marched along:
DLY’s Steady Monthly Payout
That’s because DLY, run by the “Bond God,” Jeffrey Gundlach, doesn’t fool around with investment-grade bonds. Instead, it holds 78% of its portfolio below investment grade, where the best bargains are. And we trust Gundlach—who successfully called the subprime-mortgage crisis, Donald Trump’s 2016 win and the 2022 panic—to pick the best ones.
DLY’s bonds have an average duration of 5.5 years, so it will continue to enjoy high yields for a while after the Fed (finally) begins to cut rates. The fund also uses 22% leverage, which is a happy medium—not high enough to add much risk but still sufficient to boost returns. And of course, lower rates will reduce its borrowing costs.
Those lower rates will, in turn, send more investors DLY’s way. We want to be in before that happens.
Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.
Disclosure: none
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