Our favorite high-yield bonds just hit a critical buying level. It’s time to make our move, and we’re going to give ourselves an edge by “cherry-picking” 10%+ yielding picks from the top bond minds on the planet.
And we’re going to pay nothing to do so!
The Titans of the Bond World Give Us Their Best Picks—for Free
I hate to hear people say the bond world is boring. If you’ve read about it, you know it’s packed with wild characters who’ve racked up massive fortunes.
You can’t talk about bonds without mentioning Bill Gross, the so-called “Bond King,” who basically invented the idea of trading bonds in the ’70s. From 2000 to 2009, Gross delivered 7.7% yearly returns for his investors—a huge return for bonds—which got him named Morningstar’s
MORN
But all kings are eventually deposed, and just five years later, Gross’s co-workers were so fed up with him that he decamped from the management firm he founded, PIMCO, for lesser-known Janus Capital.
Gross’s story is told in the fascinating book The Bond King: How One Man Made a Market, Built an Empire, and Lost It All. I’d highly recommend it to fellow fixed-income geeks.
From the King to “the Beast”
Gross was replaced by Dan Ivascyn, who stepped up to the plate and began banging out bond doubles himself. (Which is why his work colleagues refer to him as “the Beast.”)
No wonder PIMCO let the King walk—they had a Beast in waiting! A money manager of Ivascyn’s caliber will usually cost around 2% annually (plus 20% of profits). And it’d take a million bucks or two to get his attention. Beasts don’t come cheap!
We contrarians, however, don’t pay up for talent. We are our own silent, calculating beasts. And as such, we simply bide our time and cherry-pick funds when they “waive” their management fees.
That’s happening now with a fund run by yet another hero of the bond world. This pro is no mere king—his rule is so deep-rooted he’s known throughout the bond realm as the “Bond God.”
How the “Bond God” Built an Empire—One Call at a Time
I’m talking about Jeff Gundlach, whose contrarian calls have a record of being right—and profitable.
Like in 2007, when Gundlach warned investors to get out of subprime mortgages just before the credit markets melted down. And early 2016, when he predicted Donald Trump’s win. And most recently in September 2022, when he let slip to the press that he’d been snapping up US Treasuries.
What a call that was, as Treasuries bounced some 8% in the nine weeks from the end of September until early December, when interest rates bottomed again (as rates and bond prices move in opposite directions).
We loved Gundlach’s call because it matches up with the moves we’re making in my Contrarian Income Report service.
Here’s how Gundlach’s (and our) play worked: these days, rates have a 4% “ceiling.” Once they hit that level, they roll over, driving bond prices higher on the way down.
Back in early October, as rates broke 4% and then fell, we profited alongside Gundlach through two ETFs: the iBoxx $ Investment Grade Corporate Bond ETF (LQD
LQD
TLT
Boy, did these moves pay off:
Fast-forward to today and the yield on the 10-year is around 3.6%. That’s still below 4%, sure, but no matter—rates are topping again. The Fed is making noises about a pause and there’s still a banking crisis going on. Plus inflation is in retreat and, yes, we’re looking at a recession, likely in just a few months.
That means bond yields have further to fall. And our price upside is just getting going.
This is where Gundlach’s DoubleLine Yield Opportunities Fund (DLY) comes in: it’s yielding 10% (with a dividend that rolls out monthly) and sporting a 6.8% discount to net asset value (NAV, or the value of the bonds in its portfolio).
That discount—which you can only get through closed-end funds (CEFs) like DLY—means we’re getting Gundlach’s bond picks for 93 cents on the dollar! And remember a second ago, when I said that we wait until our CEFs waive their management fees? Well, DLY has done just that.
As I write, DLY’s fee is 2.6%. That’s high, but Bond Gods don’t come cheap! Fees like these are why many folks skip CEFs and default to ETFs, which charge hardly any fees because they’re run by algorithms that simply track an index.
But going with ETFs is a big mistake, especially in the bond world, for many reasons.
For one, the bond market is small and its key players are well connected. So pros like Gundlach get the first call when an attractive new issue comes out. Algorithm-driven ETFs just can’t compete.
Second, we never see a “bill” for Gundlach’s fee—it’s simply taken out of DLY’s NAV. The best part is we don’t even have to worry about that because Gundlach’s 2.6% “cut” is far below the fund’s 6.8% discount to NAV. In other words, as long as that deal persists, we’re getting “comped” for Gundlach’s services!
Let’s be honest—it’s unlikely even Gundlach’s family can get that deal. But we can through CEFs.
Finally, let’s talk dividends, because this is where CEFs really shine: DLY, for example, has kept its 10% payout rolling since its inception in February 2020, just before the societal dumpster fire that was about to ensue.
Not many folks realize this, but that discount has a role to play in keeping the payout steady. That’s because DLY’s 10% yield is calculated by dividing the total yearly payout by the discounted market price. But when you divide by per-share NAV (or the portfolio’s “true” value), you get a lower number—9.3% in this case.
That simply means Gundlach needs to earn less to keep our 10.1% payout rolling in.
Put it all together and we’ve got a situation where bond yields are high, valuations are cheap (thanks to discounted CEFs like DLY), we can get top management for “free,” and rates are rolling over. An ideal setup for buying bond CEFs, in other words. Especially those run by the “Bond God” himself.
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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