Trump 2.0 has exploded out of the gate, and we’re quickly lining up the best bond buys in response—including an 8.8% payer, we’ll dive into below.
“Bond Vigilantes” May Return (But We’re Not Waiting Around)
“Wait, we’re buying bonds now?” you might be thinking. “Aren’t inflation and rates going to tick higher in the new administration?”
It’s a reasonable question. And yes, when rates go up, bonds go down. That’s just the way it works in bond-land.
Tariffs are on the way. Ditto mass deportations. And last I checked, the federal government was running a $ 2 trillion deficit. (And let’s be honest, DOGE or no, politicians are in no hurry to take that problem on.)
All those things are, of course, inflationary.
Which is why the pundits are nearly unanimous in calling for a return of the “Bond Vigilantes”—bond investors who will dump Treasuries in protest of these moves, driving up the yield on the 10-year Treasury note (and with it the interest payable on government debt).
Truth is, the bond vigilantes strike terror into the hearts of all governments. The “Ragin’ Cajun,” James Carville, said it best:
“I used to think if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”
That fear is exactly why bonds are despised right now. And why we contrarians are interested!
The “5% Ceiling” Is Holding Strong
Look, I’m not saying rates won’t rise in Trump 2.0. I’m just saying that predictions of spiking Treasury rates are, at best, early.
In fact, I see a continued 5% “ceiling” on 10-year Treasury rates. The reason why comes back to none other than Jay Powell himself.
Jay cut rates by a quarter point in December—but importantly, he also gave investors a stern pre-holiday “talking-to,” with the Fed slashing its rate-cut forecast to two from four in 2025.
But here’s the thing: The bond vigilantes stirred, causing the yield on the 10-year Treasury note to spike.
In other words, the Fed cut but interest rates still rose. The bond market is clearly telling Jay, in no uncertain terms, that the job on inflation is not done.
And finally, he appears to be listening. Powell’s parental guidance may very well set a ceiling on the 10-year yield. That sure would surprise Wall Street, wouldn’t it?
The Fed pause should cement the 10-year rate’s already-strong ceiling at 5%. It means inflation will keep trending down. This means the current level of long yields may be plenty high. The Wall Street herd is betting that this ceiling breaks in dramatic fashion—I just don’t see it!
10-Year Rate Bounces Off the Ceiling
That opens the door for bonds as more investors realize this.
Our best avenue here is through a discounted, high-yield closed-end fund (CEF), like the DoubleLine Yield Opportunities Fund (NYSE:DLY).
An 8.8% Dividend With a “Stealth” Discount
DLY’s ace in the hole is its lead manager, the so-called “Bond God,” Jeffrey Gundlach, whose contrarian calls have a record of being right (and profitable).
The 2008/2009 crisis? Gundlach called it. Trump’s 2016 win? He called that, too, as well as the 2022 panic.
Gundlach doesn’t fool around with investment-grade bonds. Instead, he holds a bit more than 72% of DLY’s portfolio in below-investment-grade bonds and unrated securities. That may cause a bit of concern, but we need to keep in mind that this is where the best bond bargains are. Pensions, for example, aren’t allowed to own this paper. That leaves more room in the bargain aisles for us!
Besides, we’ve got Gundlach as our assigned shopper here, and that’s critical in bond-land, where deep connections are a must. And no one is more connected than the Bond God, who gets tipped off when the best new issues roll out.
By the way, this is why we think CEF, not ETF, when buying bonds. Algo-run ETFs simply can’t take advantage of deals like these. You can see that in DLY’s performance, which has clobbered that of the corporate-bond benchmark SPDR Bloomberg High Yield Bond ETF (NYSE:JNK) in the last year:
Gundlach Outruns the Algorithm
Now let’s talk dividends, as DLY has dropped a steady monthly payout on shareholders since it rolled down the skids in early 2020 (a launch date that sounds like terrible timing—but did allow Gundlach to snap up some high-quality assets for cheap).
The fund has also rewarded us with two sweet special payouts, at the end of both 2023 and 2024:
A Steady Monthly Payout (With Extra Bonus Divvies)
Source: Income Calendar
DLY’s bonds have an average duration of 3.2 years, so it will continue to enjoy high yields for a while after the Fed (finally) begins to cut rates. That duration also lets Gundlach change course if rates suddenly shoot higher. The fund also uses 17.5% leverage, which is a happy medium—not high enough to add much risk but still sufficient to boost returns.
Finally, this one does trade at a slight premium (less than 1%) as I write this. We don’t normally buy funds when they’re trading at premiums, but in light of the overdone fear over rates, I do see this premium getting bigger as more investors come to their senses.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."