As we approach a recession, driven heavily by aggressive rate hikes, debt investments are once again starting to become more attractive. Investors would be wise to be forward-thinking, suggests Rida Morwa, editor of High Dividend Opportunities.
The time to buy fixed-rate debt is now before rates stabilize or fall again. So with fixed rate investments near all-time lows due to the recent rate hike and high inflation environment, I want to go bottom fishing to lock in excellent yields before others flock in and their value climbs rapidly again.
PIMCO Dynamic Income Opportunities Fund (PDO) is an early favorite to pay out a substantial special dividend in 2023. Many investors were surprised when PDO increased its monthly dividend in July and followed that up with a $0.96 special dividend in December.
It is no secret that 2022 was a terrible year for bonds. In fact, it was the worst year in modern history. As a fund that invests in bonds, PDO was hardly exempt from the pain. PDO's price and its NAV fell significantly. Yet, even as prices fell, PDO paid out an increasing dividend.
The reason is that lower bond prices increase forward returns for bond investors. At maturity, bonds pay back the face value. Whether the investor bought the bond for $80 or $120, they receive $100 at maturity. Therefore, it is better for a bond investor to buy at $80.
If prices are falling because of concerns that borrowers will not repay at par, that is one thing. Yet the prices falling in 2022 had much more to do with the Fed hiking interest rates than concerns that borrowers won't repay.
As of November 30th, PDO's average bond was priced at $82.51, providing a lot of upsides as borrowers repay at $100. PDO has approximately 1/3rd of its portfolio maturing within a year. Those bonds will be repaid at maturity and reinvested into higher-yielding opportunities.
Many are expecting the Fed to pivot in 2023. At the very least, the Fed will likely stop hiking, reducing the headwinds on PDO's NAV. In my view, 2023 will be a great year for PDO to increase its income, reinvesting at the highest yields seen in decades. It also has the potential to experience a significant rebound in NAV and price as borrowers repay at par.