Prepare Now as Rates (and Fears) Keep Rising

We're starting to see cracks in the "junk" bond market... And investors are getting worried.

The two largest exchange-traded funds that focus solely on U.S. high-yield bonds – the iShares iBoxx High Yield Corporate Bond Fund (HYG) and the SPDR Bloomberg High Yield Bond Fund (JNK) – are now down 12% so far this year.

The high-yield spread – the difference between the yield on junk bonds and U.S. Treasurys – is up to around 500 basis points ("bps") from around 300 bps at the start of the year.

In other words, the average yield on junk bonds has jumped to nearly five percentage points higher than the yield on U.S. Treasury bonds. This increasing spread is a sign of rising fear.

The next credit crisis is fast approaching. No one knows exactly when it will happen. But I do know this... The combination of persistently higher interest rates and inflation will continue to take its toll on debt-ridden companies.

That's bad for corporate borrowers. But it's setting up a huge opportunity for investors who prepare now.

And while things look bad now, they're about to get much worse...

Borrowing is getting tougher and more expensive. According to the latest surveys, banks are starting to tighten credit to corporate borrowers once again. Interest rates are rising, with no signs of letting up.

The most important interest rate in the economy is the 10-year Treasury yield. It influences the rates folks pay for mortgages and credit-cards, as well as how much corporate borrowers have to pay in interest.

The yield on 10-year Treasury bonds has soared from 1.5% at the start of the year to nearly 3% today.

The most important question for the bond market is... how much higher will it go?

To answer that, you need to know where inflation is headed over the next few years. That's because 10-year Treasury bonds typically yield 2% to 2.5% more than inflation... In other words, their historical "real" yield is 2% to 2.5%.

With inflation at 8.3%, the real yield of 10-year Treasurys is negative 5.3% today (the 3% 10-year Treasury yield minus 8.3% inflation).

This relationship is incredibly out of whack. It's obvious that interest rates need to rise much higher for things to return to "normal."

Investors are ignoring today's soaring prices. They're banking on the idea that the inflation we're seeing now is a temporary spike that will settle back down. The Federal Reserve is also betting that inflation will fall to around 3% later this year and 2% over the next two years.

At Stansberry's Credit Opportunities, we doubt inflation will even drop to 4% anytime soon. But let's assume it does settle to 3% over time. That means 10-year U.S. Treasury bonds should yield 2% to 2.5% more than that... for a yield of 5% to 5.5%. That's significantly more than the 3% they yield today. And if the Fed can't get inflation under control, they could yield much more than that.

In other words, long-term interest rates are likely to move much higher.

That's bad news for consumers and businesses, both of which are sitting on mountains of debt.

Corporate debt is at an all-time high of nearly $12 trillion, more than double what it was before the last financial crisis. And consumer credit-card debt is once again rising and will likely hit an all-time high early next year.

Nearly one out of every four companies today can barely pay the interest on their debt. And with interest rates on the rise, a credit crisis is fast approaching. Many companies will go bankrupt and bond prices will collapse.

The Fed is powerless to stop it this time. If it tries to make credit easy again by reversing its tightening policies, inflation will continue to soar. Its choices are higher interest rates or higher inflation. It's a lose-lose situation.

That's why I still believe the U.S. will enter a recession later this year.

A recession is simply two consecutive quarters of declining gross domestic product ("GDP"). U.S. GDP shrank 1.4% last quarter. We're already halfway there.

The bright side is this...

At times like these, bonds get incredibly cheap – even the bonds of healthy companies. That's when the returns of our distressed-corporate-bond strategy are the highest.

In our Stansberry's Credit Opportunities newsletter, my colleague Bill McGilton and I recommend distressed bonds of companies that the market has unfairly punished... companies that won't go bankrupt. By buying deeply discounted corporate bonds like these, you can earn massive stock-like returns while taking on far less risk. Some of the world's savviest investors use this strategy in times of crisis.

The moment we've been waiting for is near. When the credit bubble finally pops, it will create some of the best bond opportunities you've likely ever seen.

The crisis we're about to enter is the perfect setup for opportunities like these. And we're positioned to make incredible returns as a result.

Good investing,

Mike DiBiase

Editor's note: Buying safe bonds at discount prices can help you make stock-like gains in times of extreme fear... with dramatically less risk than investing in stocks. In fact, since the COVID-19 crash, Mike and Bill have used it in Stansberry's Credit Opportunities to achieve a 91% win rate – and an average return of 14.7%, or 35.5% annualized. (That's more than five times the annualized return of the high-yield benchmark.)

You can learn more about how it works from one of their subscribers – including how it helped him retire early – by clicking here.

Further Reading

"Inflation is going to get worse before it gets better," Mike writes. Costs are rising for everyone, even for successful companies. And as goods and services get more expensive, you'll want a way to protect your portfolio... Read more here: We Can't Escape the Next Recession... But We Can Do This.

"Nobody knows for sure how bad unexpected inflation will get," Mike Barrett says. It's unlikely to improve anytime soon. That's why it's crucial to prepare your portfolio right now so you can profit off the best inflation-beating assets... Learn more here: Prepare for a New Source of Inflation.

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Market Notes


Today's chart shows another retailer struggling to keep up with inflation...

DailyWealth readers are familiar with the "retail apocalypse." The rise of e-commerce companies crushed brick-and-mortar retailers that didn't change with the times. But today, online and in-person stores alike are facing a major headwind – inflation. Take a look at this retail chain's struggles...

Bath & Body Works (BBWI) is a leading retailer of personal care and home fragrances. It sells everything from body lotion and perfume to candles and hand soap. Today, the company faces higher costs for materials, transportation, and wages. At the same time, consumers are dialing back their spending – especially on non-essential purchases. That's bad news for Bath & Body Works... In its most recent quarter, the company earned $154.9 million – down more than 40% year over year.

As you can see, BBWI shares are down more than 50% from their November 2021 peak, recently hitting a new 52-week low. With inflation changing consumers' spending habits and increasing the costs of running a business, retailers like Bath & Body Works face tough headwinds...