Closeup of “interest rates” text in a newspaper
Let me start with a prediction: Interest rates are going to fall this year—and by more than most people think.
When that happens, bonds—including one discounted 8.7%-paying bond fund we’ll get into shortly—are poised to head skyward.
Rates down, bonds up. That’s the law of Bond-land. It’s a simple fact that a lot of people, hopelessly caught up in the “tariffs cause inflation” storyline, are missing.
Bessent (and Trump) Go Over Jay Powell’s Head
Forget about the Fed standing pat on rates last week. Forget about Jay Powell saying he’s waiting for more clarity on the Trump administration’s policies before setting the ultimate direction of rates.
Because what Jay says doesn’t matter. When it comes to rates, there’s quite literally a new sheriff in town.
That would be Treasury Secretary Scott Bessent. More on him in a moment.
For now, the key thing to keep in mind is that when it comes to rates, Jay is now sitting at the kids’ table. The key player is the yield on the 10-year Treasury note, pacesetter for the interest rates on most consumer and business loans.
That’s always been the case, more or less. But like so many things post-January 20, it’s different now.
In the “olden days,” before this administration took office, all eyes were on the Fed when it came to the direction of rates. But the truth is, Jay and friends only control the “short” end of the yield curve—the federal funds rate, the target rate at which banks lend to one another overnight.
The “long” end—the 10-year Treasury rate—largely has a mind of its own. This is where Bessent comes in.
The $9-Trillion Man
Scott’s first days on the job haven’t been easy: His first assignment? Deal with the $9 trillion in public debt he needs to refinance in the next 12 months! If he issues traditional long-term bonds, he’ll drive up long-term yields.
So, to pull it off, he’s aiming for one thing: a lower rate on the 10-year.
“The president wants lower rates,” Bessent said in a February Fox News interview. “He and I are focused on the 10-year Treasury and what is the yield of that.”
His message to Jay? We don’t care what you do. This also likely explains why Trump has decided to let Jay serve out the rest of his term as Fed chair, which expires in May 2026.
It also explains why he’s mostly been quiet about Jay so far, compared to Trump 1.0, when he said the poor man had a “horrendous lack of vision” and once declared Jay an “enemy.” This time around, Jay is probably happy to not have his iPhone blowing up at every presidential tweet!
But back to Bessent—and his three- (okay, actually four-) step plan to knock down the rate on the 10-year.
A 3-Step Path to Lower Rates
Bessent has made clear he has a three-step plan to knock the 10-year yield down.
- Tariffs (which, as we’ve written before, aren’t inflationary because they act as a drag on economic growth).
- Drilling—to bring down energy costs.
- Deregulation—also to bring down costs (see “drilling” above), but in this case to lower the cost of doing business, while boosting productivity.
Another tailwind for the long rate? A softer labor market, due in part to DOGE.
With all this in mind, Bessent’s (and Trump’s) refusal to rule out a recession makes sense. With growth-slowing policies like tariffs, it is a possibility. Moreover, a decline in the stock market, like the one we’ve been experiencing, would drive more investors to seek out safe havens like Treasuries, driving their prices up and their yields down.
No need to go further into the weeds here—I think you can see the opportunity we have in front of us in bonds.
But we’re not buying Treasuries. Lock up our cash for a decade just for a 4.2% yield? No way! Not when there’s a cheap 8.7%-paying bond buy waiting for us to pick up now.
The Bond God’s Favorite Fund Is Our North Star in Uncertain Times
That would be the Doubleline Yield Opportunities Fund (DLY), a holding of my Contrarian Income Report advisory. 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).
Contrarian? That’s exactly the approach we want—especially now, when the mainstream crowd is more focused on the S&P 500’s daily swings than what’s really going on behind the scenes with Bessent and the 10-year.
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 around 75% of DLY’s portfolio in below-investment-grade bonds, along with another 6% in unrated securities.
The bottom line on these bonds is simply that they’re where the best bargains are. And they’re the perfect contrarian buy on falling interest rates, offering higher yields and more upside than Treasuries.
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.
Now let’s talk dividends, as DLY has dropped a steady monthly payout on shareholders since it launched in early 2020 (a launch date that sounds like terrible timing—but did allow Gundlach to snap up some high-quality assets for cheap).
A Steady Monthly Payout (With Extra Bonus Divvies)
The fund has also rewarded us with two sweet special payouts, at the end of both 2023 and 2024:
DLY Dividend
DLY’s bonds have an average duration of 5.8 years, so it will continue to enjoy high yields for quite a while. That duration also tells us that Gundlach himself is confident that rates are going to fall, so he’s “locked in” today’s higher-paying bonds, which will be worth more as newly issued bonds roll out paying lower rates.
The fund also uses 22% leverage, which is up a bit in the last few months, again showing that the fund is confident that rates will move lower and cut its borrowing costs. What’s more, that level of leverage isn’t high enough to add much risk but is still sufficient to boost returns.
Finally, this one does trade at a slight premium (around 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. That adds to DLY’s contrarian appeal, making the fund a strong buy now.
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
