Thoughtful Money with Adam Taggart · Sep 27, 2026 · 1h 7m · 54m saved
With Steven Bavaria, author, income securities investor and founder of the Income Factory
Steven Bavaria said PDI, a PIMCO closed-end fund that traded at a premium for a long time, now sells at an 8% discount while paying a 19% yield.
Rising bond yields push down the price of bonds and the funds that hold them. Bavaria wants yields to rise anyway, because his portfolio is built to collect the income and reinvest it, not to sell.
"There's been so much I'd call it investor almost panic about credit in some of these areas that they've driven discounts very high."
Steven Bavaria, author and founder of the Income Factory, on Thoughtful Money, says he has been in the credit business for a long time, and runs the Inside the Income Factory service on Seeking Alpha, which publishes model portfolios of closed-end funds, business development companies and ETFs that aim for stock-like returns from credit.
The full interview is covered here so you can skip it. 67 minutes of audio, 13 minutes of reading.
Here are the 12 takeaways that matter.
Key Takeaways
Rising rates are a net gain for a long-term income investor, Bavaria said, even when fund prices fall in the short run
About 20% of the bonds in a high-yield portfolio reprice every year
Credit-fund discounts imply default rates of 20% to 40%, which he said is unheard of in history
In the crash of about 18 years ago, 12% defaults with half recovered would mean a 6% loss rate
He would rather start an income portfolio now, with yields rising, than in a falling-rate market
Equities now look like a poor bet for someone starting out, in his view, against 8% to 10% cash yields from credit
Living only on the income protects retirees from sequence of returns risk
Barings BDC trades at about a 19% to 20% discount, he thinks, despite MassMutual's credit record
Several PIMCO funds that usually trade at premiums now sell at discounts, including PDI at 8% and PFN at 6%
A fund paying 15% but losing 3% a year in price returns 12%, not 15%, and he replaces funds whose total return falls short
1. Why Rising Rates Help
The host said bond yields have kept rising this year and asked whether that has helped or hurt the Income Factory. Bavaria said it hurts prices in the short term and helps income in the long term.
Floating-rate loans reprice within months
He said senior loans and business development companies (BDCs), which are companies that make senior floating-rate loans, reset their rates every one to three months. That leaves them with little interest-rate risk.
He avoids fixed rates for 10 to 30 years
He said a 30-year Treasury at 5% might look good today, but he would not want his rate fixed for 10, 20 or 30 years given what inflation and the deficit might do. He holds high-yield bonds, which typically run five to eight years and pay 8% to 10% or more, through funds he keeps for years.
In a high-yield portfolio, he said, about 20% of the bonds are probably repricing every year. Each one pays back 100% of face value and is reinvested at the new rate.
"So, I guess bottom line, you know, this is a little nerdy explaining all this, but bottom line for a long-term investor, I like to see rates go up." — Steven Bavaria
Only the base rate moves
He said every credit instrument pays the risk-free rate plus a spread for the borrower's credit. When the Fed moves rates it changes the base rate, the spread stays, and his income slowly rises with it.
