Powell will give this 14% payer a big boost in September

I have to laugh when I hear people say that Jay Powell was tough on interest rates. Sure, he was talk Bad luck. But when he’s not doing his Dirty Harry performance on the microphone, he’s organizing the liquidity party through the back door!

I call this “Quiet QE.” If you’ve read my articles over the last few years, or are a member of one of my premium services, you’ve no doubt heard me talk about it before.

That is half the chance we have in Corporate bonds Today.

And the other? The introduction of what I call “real” QE, in the form of interest rate cuts, to begin in September. Last Wednesday’s lower-than-expected inflation report sealed the deal.

Let’s take this further, starting with the Quiet QE that I just mentioned. Because while Jay says he took the punch bowl away from Mr. and Mrs. Market, he really didn’t. Jay saw the collapse of Silicon Valley Bank and friends in March 2023 and became afraid.

Although few noticed it at the time, the Fed’s turning point had been reached: liquidity would fall so far that—and not lower. Jay’s change of heart is clearly visible in this graph of bank reserves:

If you doubt that this is the case, consider what stocks, especially interest-sensitive technology stocks and cryptocurrencies, have done since then: They have skyrocketed! It is the exact opposite of what they should would do if monetary policy actually became more restrictive.

Fast forward to the present, and Quiet QE will soon be boosted by open Easing measures. Remember the Fed’s balance sheet contraction? Bonds were unwound rather than repurchased. This and interest rate hikes led to the 2022 bear market.

Now the Fed is almost finished reducing its balance sheet. Tightening efforts have been reduced to a minimum and will officially end soon:

In addition, the Fed is about to begin Cut Interest rates. The futures markets are currently pricing four or further cuts between now and December:

Quiet QE. No further measures to reduce interest rates. This is a Great Time to become a dividend investor. But what should we buy?

This 14% yielding corporate bond fund is a smart bet on falling interest rates

Fortunately, there is a fund with a yield of 14% that is perfect when interest rates fall: a corporate bond-focused closed-end fund (CEF) called PIMCO Dynamic Income Fund (PDI).

It is a ticker members of my Contrarian Income Report Service will know: Since we added it to our portfolio in May 2023, it has returned 22.5% – a big step for a bond fund.

Sure, maybe we were a little early for the interest rate peak last fall, but that’s OK – we did get a nice return of 22.5%, mostly in the form of dividends. And more importantly, we’re well positioned for the next stage. down in the prices.

Falling interest rates drive up bond prices (especially the prices of long duration High-yield bonds such as those in PDI’s portfolio with an effective maturity of 5.44 years) because these very good compared to lower-yielding corporate bonds issued when interest rates are falling.

PDI’s “Beast” tells it like it is

This ability to “surf the price tide” is the reason why we opt for a human-managed CEFIn contrast to an algorithm-driven ETF to carry out our bond purchases.

In the cozy world of bonds, well-connected managers are the first to be called when the best new issues come out, and few are better connected than PDI’s Dan Ivascyn, nicknamed “the Beast” by his colleagues because of his long track record.

What else we appreciate about Ivascyn is that he says what he thinks. He recently told Reuters that he thinks the market’s expectations for a rate cut are getting ahead of expectations. There will only be a 25 basis point cut in September and “future meetings will be live.”

We love it when managers say what they think and don’t just “talk their own mind.” Since high yield would benefit from a rapid decline in interest rates, Ivascyn could have easily endorsed that possibility. But he didn’t. He now says he’s looking for opportunities in “safer parts of the credit market.”

In the meantime, for people who are “in the know” about this great bond fund, that 14% yield means a nice, steady (and monthly) source of income, with special dividends on top:

Another plus? Like many CEFs, PDI uses debt to boost its yield, amounting to about 37.5% of its portfolio. If interest rates fall, borrowing costs will also fall, boosting overall returns and further supporting the dividend.

A timely “dip buy”

Of course, PDI isn’t exactly cheap right now, trading at a 10% premium to net asset value (NAV, or the value of the underlying portfolio). That’s $1.10 for every dollar of assets! But keep in mind that PIMCO enjoys legendary status in the CEF world, and its funds often trade above NAV.

Still, that premium is a bit high for us, so we’re putting PDI on our watch list (or rating it a hold if you already own it). We’ll buy this great fund on its next dip.

Brett Owens is Chief Investment Strategist for Contrary outlook. For more great income ideas, check out his latest special report: Your early retirement portfolio: Huge dividends – every month – forever.

Disclosure: none