Inflation fears have taken hold across the media, the bond market, and the futures market, with many investors convinced that high prices and elevated interest rates are here to stay.
Contrarian investors, however, are watching the same data and drawing a very different conclusion, arguing that deflation rather than inflation should be the dominant concern right now.
The 10-year Treasury yield sits just under 4.5%, while the 30-year yield has held around 5% for several weeks, creating a challenging borrowing environment for consumers and governments alike.
Futures traders currently expect the Federal Reserve to hold rates steady for the next six months, with a slim majority then pricing in a rate hike in January, according to CME Group data.
Despite that consensus, wage growth has been trending downward since the pandemic, with April’s rate of 3.6% falling behind the CPI, a dynamic that historically causes consumers to pull back spending.
An April 2026 Goldman Sachs study found that artificial intelligence slowed monthly US payroll growth by 16,000 jobs over the preceding year, adding further deflationary pressure to the labour market.
With Kevin Warsh settling in at the Federal Reserve, the expectation is that the administration’s preference for rate cuts will eventually be acted upon as soon as conditions allow justification.
These deflationary signals have pushed preferred-share closed-end funds (CEFs) into oversold territory, creating what contrarian investors see as a rare opportunity to lock in high yields at discounted prices.
The 7.7%-yielding John Hancock Premium Dividend Fund (PDT) invests 43% of its assets in common stocks, 30% in preferreds, and 26% in bonds and other income securities, with leverage of around 34% of its portfolio.
PDT is currently trading at a 12.1% discount to its net asset value, a notably deep markdown given that the fund has traded around par on average over the past five years.
The Flaherty & Crumrine Dynamic Preferred & Income Fund (DFP) offers an 8.6% dividend paid monthly, with 51% of its portfolio in preferred shares and 45% in bonds as of February 28.
Flaherty & Crumrine has operated in fixed income for more than 40 years, and the argument is that its deep personal connections in the preferred market give it an advantage that AI fund managers cannot replicate.
DFP management delivered a special dividend at the end of last year and raised its regular payout with the latest payment, signalling confidence despite the current rate environment.
The fund is currently trading at an 8.3% discount to NAV, a level it has been stuck at for several years, with dividend hikes and special payouts seen as tools to attract new buyers and narrow that gap.
When inflation fears eventually subside, yields on existing fixed-income assets are expected to slide, increasing the value of DFP’s portfolio and pushing its discount back toward par, where it traded before the 2026 inflation scare took hold.
