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There's only one word that investors need to be focusing on right now: inflation.
As long as inflation is higher than the Federal Reserve is comfortable with, the Fed will be inclined to raise interest rates to tame inflation.
Higher rates effect consumer credit card spending, the US housing market, and more importantly for us, the valuation of companies (most specifically tech companies) based on the discounted free cash model that uses interest rates as a key input.
Over the last several weeks, I've covered various types of inflation-beating investments, and this week we're going to talk about high yield corporate debt.
Before I go any further, I want to make sure everyone understands what I mean by "high yield corporate debt" and the risk associated with this asset class.
As a profit play for regular investors, it's anything but "junk." It's an essential moneymaking tool right now.
Here's what I mean...
Why Junk Debt Is the Smart Move Right Now
Many people refer to high yield corporate debt as "junk debt" because the companies that hold the debt get low marks from the credit rating agencies, and as a result, the yield associated with these bonds comes from the higher risk offered in this asset class, as a whole.
My favorite way to profit from the high yield corporate debt market is iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) which boasts more than $15 billion in assets, diversified across more than 1,200 holdings.
As I write this, the 30-day SEC yield on HYG is a very healthy 6.96% which is considerably higher than the 3.039% yield on U.S. 10-year Notes.
That's a very attractive yield, but there are few things to consider you pile into HYG in search of its high yield.
If you're worried that the economy might move into (or is already in) a recession, or if you think the Fed's higher rates could have a negative impact on the borrowing cost to companies with lower credit ratings, then you probably want to limit the amount of capital you allocate to HYG.
That being said, if you think the 1200-plus holdings in HYG gives you a comfortable level of protection (by way of diversification), then you might want a larger position in HYG.
To be clear, HYG shouldn't be your entire inflation strategy, but you can do really well with it as part of a wider strategy like we've talked about over the past few weeks.