While Markets Expect Declining Rates, Get More Yield With BKLN

The capital markets continue to anticipate declining rates from the U.S. Federal Reserve as economic data is starting to show signs of slowing inflation.

Still, the consumer is feeling the pangs of a high-rate environment, especially when it comes to borrowing money. As such, this could make consumers think twice about purchasing large items, such as a home.

“Rising interest rates can sometimes feel like a double-edged sword,” said Kelly LaVigne, vice president of consumer insights at Allianz Life, via a CNBC report. “While savings accounts are earning more interest, it is also more expensive to borrow money for big purchases like a home, and many Americans worry that rising interest rates are a harbinger of a recession.”

Additionally, inflation is proving to be more stubborn than initially anticipated. As such, investors are flocking to inflation-hedging techniques like Treasury Inflation-Protected Securities (TIPS), which casts doubt on the Fed’s ability to tame inflation.

“Bond investors made clear this week that they doubt the Federal Reserve’s ability to return inflation to its 2% target,” The Street reported. “Yields on inflation-protected Treasury debt have climbed to levels about 2.3 percentage points lower than regular rates on US government bonds. The gap represents the average annual change in the consumer price index needed to equalize their returns.”

Get More Yield to Outpace Rate Hikes

Another option besides TIPS is simply outpacing rate hikes by obtaining more yield. If investors are comfortable with this foot rate, they also need to assume more credit risk — if so, they may want to consider the Invesco Senior Loan ETF’s (BKLN).

As of July 21, the fund has a 30-day SEC unsubsidized yield of 8.37% with a 12-month distribution rate of 6.76%. While the numbers may appeal to fixed income investors, they still need to be wary of the portfolio’s holdings.

“By tracking the S&P/LSTA U.S. Leveraged Loan 100 Index, BKLN provides exposure to 100 of the largest, most liquid leveraged loans based on market weightings, spreads, and interest payments,” The Street said of BKLN, which made its list of high-yield recommendations. “Many of these loans tend to pay floating rates, which can offer protection against rising interest rates. That being said, it comes with high default risk given the poor credit ratings of the underlying companies.”

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