2024 is hours from heading out the door, and here’s the state of play:
The Federal Reserve cut interest rates for a third consecutive meeting on December 18. Yet the yield on the 10-year Treasury is now higher than when the easing cycle began.
Wait. What?
The bond market has been screaming at Jay Powell that the job on inflation is not done. It makes sense: The economy is fine. There are plenty of jobs. The market is not hurting for liquidity.
Finally, Jay is catching on. And here’s the twist: The hawkish guidance he gave on rates at that December 18 meeting—including the Fed’s expectation of two rate cuts next year instead of four—could actually set the stage for a top in the 10-year Treasury yield.
We got a hint of that on December 20, when the personal consumption expenditures price index (PCE) dropped. It’s the Fed’s fav inflation gauge, and it came in lower than expectations, causing the 10-year Treasury rate to edge lower.
This just proves what I’ve been writing about pretty much since the election: Everyone is assuming Trump 2.0 will lead to higher interest rates. And, contrarians we are, we know that when everyone expects something to happen—something else usually does.
“High Rates Forever” Story Has Contrarian Opportunity Written All Over It
Look, I’m not saying that rates are going to suddenly plunge, or that our call for a “no-landing” economy is going to change. But I do see this “high rates under Trump” story as overplayed.
That opens the door for bonds (and bond proxies) as more investors realize this. But we’re certainly not buying Treasuries or investment-grade paper here. The yields are still too low, and Treasuries require us to lock up our cash for a decade.
Instead, we’re shopping mainly in the high-yield aisle, where the biggest bargains (and dividends!) lie. And the best way to do that is through a high-yield closed-end fund (CEF), like the PIMCO Dynamic Income Fund (PDI).
A 14.4% Dividend With a “Stealth” Discount
The simple truth in bond-land is that when 10-year Treasury rates are rising, bond prices are falling, and if Powell’s “adult-in-the-room” stance puts in the top I think it will, buying a bond CEF like PDI right now is a canny move.
The fund is run by PIMCO, specifically Daniel J. Ivascyn, who manages PDI. If you’ve read my articles for a while, you know I’m a PIMCO fanboy. And Ivascyn, who can boast deeper connections in bond-land than just about anyone else, is so respected in the bond world he’s known simply as the “Beast.”
It’s easy to see why: PDI (in purple below) has posted a 110% total return in the last 10 years, as of this writing, more than doubling the go-to corporate-bond ETF (in orange), on the strength of Ivascyn’s skill and deep Rolodex (or, more accurately, iPhone contact book), which tips him off to the best new issues:
Now if you’ve skipped ahead and looked at PDI on a screener like CEF Connect, you’re probably wondering why I’m recommending PDI, even though it trades at a premium to net asset value (NAV) that clocks in at 8% as I write this.
Good question! It really does mean we’re paying $1.08 for every dollar of assets here. But here’s the thing: PIMCO is a revered name in CEFs—it’s safe to consider it the Apple (AAPL) of the space—so its funds almost always trade at premiums, and often double-digit ones.
That makes PDI a bargain in disguise, especially when its current premium is below its five-year average of 9.1% and it’s seen premiums as high as 21% in the last few years.
That’s why I continue to rate PDI a buy in my Contrarian Income Report advisory.
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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