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Here's What Powell's NOT Telling Us About Interest Rates
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WASHINGTON, DC - SEPTEMBER 20: Federal Reserve Board Chairman Jerome
Powell speaks during a news ... [+] conference after a Federal Open
Market Committee meeting on September 20, 2023 at the Federal Reserve
in Washington, DC. In the face of slowing inflation and strong
consumer spending, the Federal Reserve announced that it will keep the
interest rate steady, holding the benchmark borrowing rate to a range
of 5.25% to 5.5%. (Photo by Chip Somodevilla/Getty Images)
Getty Images
"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:
Fed Adds Liquidity
Federal Reserve
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**
DLY Dividend History
IncomeCalendar.com
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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