Fitch Slapped: Nifty 9.5% Dividend is Discounted, Ready to Rise

Brett Owens, Chief Investment Strategist
Updated: August 9, 2023

Everyone hates bonds right now. Perfect—let’s buy this nifty 9.5% payer while it’s discounted!

Why the sale? A bearish narrative, of course. In 2023, we have a narrative for everything, after all.

Last week, the Bank of Japan (BOJ) announced it is softening “yield control” efforts for 10-year Japanese government bonds (JGBs). Inflation is finally picking up in Japan, and the BOJ is still printing money to buy JGBs.

Ironic? Yes. But the BOJ, the money-printing addict, is finally admitting it has a problem. We can think of this as step two of a potential multi-step inflation recovery effort. (Similar “starter” measures began in September.)

The 10-year JGB soared on the announcement to nine-year highs. US 10-year Treasury bonds likewise popped back above 4% on the news.

Then came the doozy from Fitch Ratings, which downgraded US government debt from its pristine AAA rating. (America was “Fitch slapped,” reported the Internet. Ha!)

The reaction to the news is always most interesting to us contrarians. It wasn’t pretty because stocks had recently been bid to the moon. They had nowhere to go but down, and down they went.

The US bond market was routed too, hence those 10-year yields above 4%. Bond prices drop when yields rise. So there’s an interesting thing about bond selloffs. They create better yields.

Not so for the S&P 500, which still only pays 1.4%. Put a million dollars into SPY, and we collect a pitiful $14,000 in yearly income. That’s below the poverty level. No bueno!

Long-dated US Treasuries at 4% are interesting. Eventually, these high rates are going to break the economy. We’ll head into a recession, and yields will come down. As they always do.

And bond investors who locked in 4% today will be bragging.

But we contrarians will crow louder. We’re locking in a 9.5% payer—at a discount to boot!

Vanilla stock and bond investors, meet DoubleLine Yield Opportunities (DLY), a fixed-income fund dishing 9.5%. DLY is discounted, trading at 5% off its net asset value (NAV). Buyers today  bank DLY’s bonds for 95 cents on the dollar. This almost never happens with DLY!

Contrast DLY with the popular iShares 20+ Year Treasury Bond ETF (TLT), which pays 4.2% and trades at par. No deal here.

This is the big advantage we have with closed-end funds (CEFs) like DLY. They often trade at discounts to their NAVs thanks to their fixed pools of shares. Where ETFs can’t trade above or below their NAVs, CEFs can respond to the emotions of the market. Good for us!

Be careful, though. Markdowns can be as common as premiums! Even with the current gloom in Bondland, PIMCO Corporate & Income Opportunity (PTY) trades at a 35% premium as I write. That’s right, investors are paying $1.35 for $1 in bonds. A very bad decision. PTY is not exactly a go-go tech stock you might pay up for expecting future riches.

Oh, we pity the fools buying PTY at such lofty levels!

PIMCO is a great bond shop, sure. Top of the heap. But there’s no reason to pay a 35% premium, no matter the management.

Especially when you can grab DLY in the sale section. DoubleLine is a heavyweight equal to PIMCO in the bond arena—it’s run by the Bond God Jeffrey Gundlach, whose decades of massive success have brought income to the savvy. The market is giving away five cents on Jeff’s DoubleLine dollar here, plus a 9.5% yield. Can contrarians be so happy?

Yes! Let’s take the deal—while we can.

And while we’re at it, let’s load up our retirement portfolio with more 8%+ dividends at discounts—like these monthly payers.