ONE DEFAULT FROM DISASTER
yield curve is extremely close to inverting . The yield curve last inverted in 2006. Before that, banks had been loosening credit. After the yield curve inverted, they immediately began tightening. By 2008, more than half of all banks were tightening. We all remember what happened next... And in January, banks began to tighten for the first time since 2015. In 2015, the banks tightened as oil prices collapsed. The yield curve wasn’t close to inverting. Banks eventually loosened credit as oil prices recovered. But that isn’t the case this time... If this tightening trend from the banks continues, I believe it will trigger the next financial crisis. The high-yield corporate bond market will crash first. But the fallout will spread beyond the bond market into the stock market. Investors will flee from highly leveraged companies – considered safe today – crashing share prices. The good news is, you don’t have to fear the coming collapse. You don’t have to be one of the victims. In fact, you can profit from it... When the panic arrives, investors won’t pay attention to what they’re selling. The bonds of many good companies will be sold off indiscriminately along with the bad ones. It will be a fantastic, once-in-a-decade buying opportunity. You’ll be able to pick up extremely safe bonds allowing you to earn large, equity-like returns through the corporate bond market. You’ll get the upside of stocks but with far less risk, for pennies on the dollar.
Banks don’t have to worry nearly as much about huge credit losses... That’s because they sit atop the debt structure. They get paid first in a bankruptcy. And they have much greater credit protections. So they’ll recover far more of their investments than most debt investors. If the banks don’t do it on their own, an inverted “yield curve” will force them to tighten... Banks borrow money with short maturities and lend it out with long maturities. So they make money when long-term rates are higher than short-term rates. When this relationship flips – the yield curve inverts – banks suddenly begin losing money. They have to pay more in interest to their creditors than they earn on their loans. This doesn’t happen often – normally, long- term rates are higher to compensate investors more for tying up their capital longer. But when it does, banks start tightening. The most widely used yield curve is the difference between rates on 10-year U.S. Treasurys (which yield around 2.60%) and two-year Treasurys (which yield around 2.45%). The difference is around 15 basis points (0.15%) right now. In other words, the Mike DiBiase is an analyst and former CPA with over 20 years of experience in financial management and accounting. Before becoming a senior analyst with Stansberry Research, Mike was Vice President of Finance & Planning for a large software company where he helped grow revenue more than $1 billion.
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April 2019
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