The Bond King may be battered and bruised a little bit, but his words still cary some weight, with two of his three Barron's Mid-Year Roundtable picks from this weekend posting big gains on heavier-than-usual volume. The thesis: Own some mildly levered closed-end bond funds which can borrow at 10 or 20 basis points, re-lend the money at 400 to 500 basis points, and produce a yield of 7-8%.
One Bill Gross is buying for his own portfolio is the BlackRock Build America Bond Trust (BBN +2.5%). The feds subsidize 35% of the interest paid, the fund usually owns A- and AA-rated long-term bonds, and currently yields 7.5%.
He's also a buyer of the Pimco Dynamic Income Fund (PDI +1.1%), an owner of non-agency mortgages expected to yield between 8-10%. On sale for some time, the fund now trades at about net asset value.
Gross' third pick is an ETF, the iShares U.S. Preferred Stock Fund (PFF +0.1%). Liquid with an expense ratio below 50 bps, the fund primarily holds bank preferreds. It's a short-term play, says Gross, as many of the preferreds in its portfolio will be refunded within a year or to and the dividend will fall. In the meantime, one can collect a 5.5% yield.