Interest Rates Are Falling And These 7% Paying ‘Bond Proxies’ Are Buys

Navigating Economic Uncertainty: The Insight of the 10-Year Treasury Rate

The global economy is currently navigating a storm of uncertainties, with trade tensions and inflation fears dominating the headlines. However, for investors seeking clarity, the 10-year Treasury rate emerges as a reliable indicator. This key metric, which influences rates on most loans, is sending a clear signal: the current inflation fears are overblown. Instead, the primary concern is an economic slowdown, which could lead to rate cuts by the Federal Reserve sooner than expected. By "buying the dip" in undervalued bond-proxy closed-end funds (CEFs) yielding around 7%, investors can capitalize on this insight. The 10-year Treasury rate has surprisingly dropped this year, contrary to what would be expected if inflation were a genuine threat. This suggests that slowing growth, rather than surging prices, is the main risk, prompting the Fed to potentially lower rates more aggressively than anticipated.

The 10-Year Treasury Rate: A Beacon of Economic Insight

The 10-year Treasury rate is a trusted barometer of economic health, and its recent decline is a powerful signal. It indicates that inflation fears, despite their prevalence in media and markets, are misplaced. Instead, the economy is likely heading toward a slowdown, which could prompt the Federal Reserve to cut interest rates more swiftly than most analysts predict. This shift in economic trajectory has significant implications for investors, as lower rates typically lead to higher bond prices. Consequently, this presents an opportune moment to invest in bond-proxy assets, such as utility-focused closed-end funds, which are currently undervalued due to misplaced market concerns about inflation.

Tariffs, Growth, and the Myth of Inflationary Pressures

Recent studies have challenged the notion that tariffs are inflationary. According to the Centre for Economic Policy Research, tariffs do not lead to higher prices because they tend to slow economic growth, which in turn acts as a drag on inflation. The Financial Times echoes this conclusion, noting that while tariffs may squeeze company margins by increasing costs and wage pressures, these effects are often absorbed by firms and their shareholders rather than passed on to consumers. This aligns with the 10-year Treasury rate’s message, reinforcing the view that economic growth is slowing. For investors, this means lower interest rates are on the horizon, creating a favorable environment for bonds and bond-proxy assets like utilities.

Strategic Portfolio Adjustments: Embracing Bonds and Utilities

In light of these insights, a strategic shift toward bonds and bond proxies, particularly utilities, is prudent. The Contrarian Income Report portfolio has already pivoted in this direction, recognizing the potential for capital gains as interest rates fall. Utilities, with their steady cash flows and resilience during economic slowdowns, are particularly attractive. Among the top recommendations are two 7%-yielding closed-end funds: the Reaves Utility Income Fund (UTG) and the BlackRock Utility Infrastructure & Power Opportunities Trust (BUI). Both funds have recently experienced declines, not because of fundamentals but due to broader market misperceptions about inflation. This presents a unique buying opportunity for investors seeking income and capital appreciation.

A Closer Look at Reaves Utility Income Fund (UTG)

The Reaves Utility Income Fund (UTG) stands out as a top pick for investors. Since its addition to the Contrarian Income Report portfolio in June 2023, UTG has delivered a impressive 38% total return. This "pure play" utility fund boasts a diverse portfolio of U.S. utility giants, including Sempra (SRE), Vistra Corp. (VST), PPL Corp. (PPL), and Entergy (ETR). While primarily focused on electrical power, UTG also holds stakes in adjacent industries, such as pipeline operator Enterprise Products Partners (EPD) and data-center REIT Equinix (EQIX), which is benefiting from the surge in demand for computing power driven by AI. With a modest leverage of 19% and a history of steady, gradually increasing monthly dividends, UTG offers both income and growth potential. Currently trading around par, UTG is effectively discounted compared to its historical premium, making it a compelling investment as the market shifts its focus from inflation to growth concerns.

BlackRock Utility Infrastructure & Power Opportunities Trust (BUI): A Diversified Utility Play

For those seeking a more diversified utility-focused fund, the BlackRock Utility Infrastructure & Power Opportunities Trust (BUI) is an excellent option. Yielding 7%, BUI provides exposure to a broader range of assets, including utilities, capital goods, and energy. Its portfolio is anchored by major utility players like NextEra Energy (NEE) and Constellation Energy (CEG), while also including firms like Trane Technologies (TT) and GE Vernova (GEV) in the capital goods and renewable energy sectors. Additionally, BUI offers geographic diversification, with 33% of its holdings outside the U.S., spanning countries like France, the U.K., and Italy. Unlike UTG, BUI avoids leverage, further reducing its risk profile. The fund also generates extra income through covered-call options, enhancing its yield. Currently trading around par, BUI, like UTG, is poised to see its premium expand as investors recognize the shifting economic landscape.

Conclusion: Positioning for Success in a Changing Economic Tide

The current economic environment is complex, but the 10-year Treasury rate offers a clear roadmap for investors. With inflation fears overblown and growth slowing, the stage is set for lower interest rates and higher bond prices. Utility-focused closed-end funds like UTG and BUI, with their high yields and undervalued prices, are ideal investments in this climate. By capitalizing on these opportunities, investors can build a portfolio resilient to economic uncertainty while generating steady income.