Editor's note: If you're like most folks, you've probably never considered buying bonds...

But as Stansberry's Credit Opportunities editor Mike DiBiase explained yesterday, that's a big mistake. In reality, bonds are much safer investments than stocks.

In today's Masters Series – the conclusion of an exclusive two-part interview – Mike details how the new bear market has led to elevated fear in the markets. It's creating attractive opportunities that he has waited for. But according to Mike, it could still get worse...

Fear Is Soaring Today... But the Worst Is Yet to Come

An interview with Mike DiBiase, editor, Stansberry's Credit Opportunities

Dean: Mike, over the past few years, I've learned that Digest readers love to see examples. They want to hear the specifics about successful recommendations. Can you share any?

Mike: Sure... Two years ago, we recommended a bond issued by the parent company of Chuck E. Cheese – the pizza chain known mostly for kids' birthday parties and its costumed mouse mascot.

Back then, the company's sales were sliding. As a result, its only outstanding bond began trading at a distressed level, at around $810. The bond offered an annual yield to maturity of 15%, more than double the yield of similarly rated bonds at the time.

But we knew investors were ignoring history and the staying power of this great, simple business. The pizza chain has made kids happy for 40 years. It was in no danger of bankruptcy. Plus, it had highly motivated owners in charge...

The company was owned by Apollo Global Management (APO), a private-equity firm that had millions of dollars riding on its turnaround. We were banking on Apollo doing what it does best... turning the business around and selling it for a profit.

Less than a year later, the company's same-store sales began to grow again, and Apollo announced a plan to take the company public. The bond began trading above par value... up to around $1,010. We sold the bond above par and captured all our capital gains nearly three years sooner than expected. We booked a total return of 33% in less than a year.

That's just one example of how we can generate equity-like returns with this strategy...

Since launching Stansberry's Credit Opportunities back in November 2015, we've closed out of 26 bond positions. More than 80% of them have been winners. The average annualized return of our closed positions is 16.6%. That's more than double the 7% return of the overall high-yield corporate bond market – as measured by the iShares iBoxx High Yield Corporate Bond Fund (HYG).

We've even beaten the stock market... You would have earned an annualized return of only 15.4% if you had invested in the S&P 500 Index instead of the bonds we recommended.

And keep in mind... we did this with far less risk than investing in stocks. And we also did it in a period during which corporate bonds have been expensive.

Dean: That's right. You've been doing this in Stansberry's Credit Opportunities for nearly five years. But until recently, it had been smooth sailing in the markets. The credit crisis you expected hasn't unfolded yet. So has it been hard to consistently find opportunities?

Mike: It has been difficult, but there are usually a few outliers out there every month, waiting to be discovered. We've found some really good opportunities through the years.

By "smooth sailing," I believe you mean that investors have bid up the prices of corporate bonds in recent years. That's true... Remember, the higher the price you pay for the bond, the lower your return will be. And since prices have been high, there have been fewer distressed bonds to choose from.

Our distressed-bond strategy works best when the credit market is in turmoil... when investors are scared. That's when they sell their bonds because they think they're too risky.

When investors are really scared, they'll even sell safe bonds. Savvy investors can then scoop them up for pennies on the dollar and make a fortune on the capital gains.

We measure the level of fear in the bond market by looking at the high-yield credit spread...

It's the difference between the average yield of high-yield – or so-called "junk" – bonds and the yield of similar-duration U.S. Treasury notes.

We monitor the high-yield credit spread closely... We've learned that the best distressed-debt opportunities often appear when the spread rises above its long-term average of 600 basis points ("bps").

The spread has spent most of the past few years at less than 400 bps, well below its average.

That means the average yield of distressed bonds was only about four percentage points greater than similar-duration U.S. Treasurys. In other words, distressed bonds were yielding around 5%, on average, versus around 1% for the U.S. Treasurys.

Dean: So it has been historically low, for the most part, over the past several years as the bull market churned on. But with the new bear market upon us and fear sweeping the markets in recent weeks, has that changed at all?

Mike: Yes, it has changed dramatically over the past two months...

The high-yield credit spread blew out briefly to more than 1,000 bps late last month. It has recently come back to about 900 bps, but it still remains well above its long-term average.

As distressed-debt investors, this is what we've been waiting patiently for. We're seeing many more opportunities today. We're excited to help our subscribers in the months ahead.

Dean: So with the soaring high-yield credit spread, does that mean it's time to go "all in" on these opportunities? Or do you look at other factors when figuring out when the time is right?

Mike: Despite the high-yield credit spread being well above its long-term average today, we don't think it's time to go all-in yet. We're still cautious.

First, we know the spread can go much higher... During the last financial crisis, it widened to as high as 2,200 bps. And the default rate – the number of companies filing for bankruptcy – is still low today... at around 3%. During the last crisis, it soared to 12%.

Standard & Poor's is now forecasting a 10% default rate by the end of the year. The agency's "pessimistic" forecast projects the default rate to reach 13%. That would be the highest it has been in 40 years. And as more companies begin to default in the months ahead, investors will have less of an appetite for corporate bonds. That will create more attractive opportunities for us.

On top of that, there are too many unknowns today to go all-in... We're in uncharted waters with the COVID-19 crisis. It's still not clear how long the crisis will continue to disrupt businesses or how it will impact the U.S. economy and corporate earnings.

And we don't know if the Federal Reserve will be willing to buy or guarantee junk bonds like it's doing with investment-grade bonds. If it doesn't, credit for risky borrowers could suddenly dry up. If that happens, corporate bankruptcies will skyrocket.

So in my personal view, I believe that things will get much worse in the credit markets before they get better. That's why it's critical to be patient and not dive in headfirst.

Dean: OK, so we still want to be cautious... But that doesn't necessarily mean sitting idle, right? I know you've been hard at work as the high-yield credit spread started widening. What can you tell us about the types of opportunities you've identified in recent weeks?

Mike: Right, we're definitely not sitting on the sidelines. We're taking full advantage while the spread is high...

A few weeks ago, we bypassed our normal publishing schedule and issued a special update with seven new bond recommendations. We called it our "first wave of distressed-debt buying."

These are high-quality, safe bonds that recently sold off over the last month. They were unfairly punished due to current market conditions.

These companies are built to survive a recession. They produced solid cash flows heading into the COVID-19 crisis. They all have strong balance sheets, a lot of liquidity, and manageable debt maturities over the next two years.

Nearly all of these seven bonds traded for more than par value in February. But thanks to the sell-off, we were able to help our subscribers get them at discounts to par. And we expect many of them to return to par or higher over the next year or two... once the economy shows signs of improvement.

If that happens, we'll be more than happy to sell even before maturity. By doing that, we would capture our capital gains early and increase our yield to maturity.

Dean: When we were talking a couple of weeks ago, you mentioned Edward Altman. Can you explain who he is, what he recently warned, and why you agree with what he said?

Mike: Edward Altman is an emeritus professor at the New York University Stern School of Business. He's better at predicting corporate bankruptcies than anyone else in the world.

He created the famous "Altman Z-score" in 1968. It's a formula that assigns a number to a company based on many variables... And more important, it's used to predict bankruptcies.

Altman recently warned that we're headed into the worst period for corporate defaults that we've ever seen, as measured by the amount of debt that will go bad. He expects $150 billion in junk bonds to default in this credit cycle.

I see the same thing happening... Companies are much more leveraged today than they were leading up to the last financial crisis. Corporate debt is at an all-time high. And the credit quality of the debt is at an all-time low.

It's a recipe for disaster.

Investors need to know that they don't have to be the victim. Thanks to our innovative strategy in Stansberry's Credit Opportunities, they'll be able to profit when the storm hits.

Dean: OK, Mike, before we wrap up, is there anything else you believe Digest readers should know about where we stand right now or when the next credit crisis will come?

Mike: Look, no one likes to see people lose their jobs, the stock market crash, and retirement accounts that are suddenly worth much less than they were two months ago.

But even in times of crisis, you can make money. Buying distressed bonds is a great way to do it... The world's wealthiest investors – guys like Warren Buffett, David Tepper, and Howard Marks – have been doing it for decades. They pounce in times of crisis.

The assets of companies that go bankrupt don't go away. Their ownership just changes hands. Stansberry Research founder Porter Stansberry has said the next credit crisis will be "the largest legal transfer of wealth in history."

He has also said that most investors would be better off if they only invested in bonds and never bought stocks. Most people have a hard time making money with stocks. But if they only gave it a try, they'd have a hard time losing money with bonds.

It's true... Buying bonds is a little more difficult than buying stocks. But it's well worth the extra effort, especially during a crisis. That's when bond prices become cheap. Remember, bonds become safer investments as they get cheaper... Their returns get higher, and their potential downside gets smaller.

In Stansberry's Credit Opportunities, we strive to help everyday folks find the best opportunities to profit from this strategy. And we're excited today... This is the time we've been waiting years for.

Dean: Thanks again, Mike, for taking the time to chat with us this weekend. We'd love to talk to you again in the coming weeks and months as this situation unfolds in the markets.

Mike: Thanks for having me, Dean. I'm always happy to explain what I believe is going on. As you know, we always want to do what's best to help our subscribers succeed.

Editor's note: Many folks lost a lot of sleep as the value of their investment accounts shrunk over the past six weeks. But not one paid-up subscriber from upstate New York...

You see, after retiring early at age 52 thanks in part to investing in distressed bonds, he also weathered the recent market sell-off without worrying at all. And now, we've turned the microphone over to this subscriber so he can share all the details. Learn more here.