U.S. Treasury Yields Turn Negative

Last chance for our distressed-bond service… U.S. Treasury yields turn negative?... Corporate bonds are the 'only game in town'…

We begin tonight's Digest with an urgent reminder...

By now, you've likely heard that Porter is offering an incredible discount on his exclusive distressed-bond service, Stansberry's Credit Opportunities.

If you're not familiar, there is simply no other service like this available to individual investors anywhere in the world, as far we know. Porter spared no expense to build a proprietary analytical engine that can monitor the entire U.S. corporate-bond market. This system is designed in search for the "needle in the haystack" – mispriced bonds offering generous yields and huge potential capital gains with far less risk than buying stocks.

The last time we launched a bond service (in 2008), subscribers were able to earn 16% annual returns through the end of 2010, including gains of 773% in Rite Aid bonds – the second-best-performing recommendation in our company's history.

But Porter and his team believe the opportunities will be even better this time around... because the coming default cycle will be worse, and because the tools they've developed are much better and more sophisticated than they had last time.

They're off to a good start so far... Since launching in November, every Stansberry's Credit Opportunities recommendation has gone up in value. But Porter expects the opportunities to get considerably better in the months to come. In fact, he believes the next bond market panic could begin as soon as October.

If you agree to try Stansberry's Credit Opportunities tonight, you can lock in three full years of access for 60% off the regular subscription cost. And as always, you can try it absolutely risk-free.

We have never made this offer before... and we'll likely never be able to make it again. But if you're interested, we must hear from you immediately. This offer closes promptly at midnight Eastern time tonight. Get started here.

In the meantime, while we see big trouble ahead for the U.S. corporate-bond market, it appears many folks are still blissfully unaware.

Investors have been pouring money into corporate bonds and bond funds for months. And as Bloomberg reported late last week, this trend is now accelerating as the global "reach for yield" continues. From the article (emphasis added)...

The foreign hunt for yield in U.S. markets is stepping up as central banks in Europe increasingly crowd out investors from their domestic credit markets.

Higher policy rates in the U.S. have reeled in heavy private-sector foreign flows into U.S. corporate bonds this year. And this trend is poised to intensify as valuations in European credit markets become more stretched, while declining returns from currency-hedged investments in Treasurys push portfolio managers into the higher-yielding U.S. corporate credit market, say analysts.

That last sentence is important…

Regular Digest readers know the central banks of Europe and Japan have pushed short-term interest rates into negative territory. This, in turn, has pushed yields on their sovereign debt into negative territory, too… even out to 30-year bonds in Germany and 40-year bonds in Japan.

In the U.S., yields on Treasurys are still positive. Benchmark 10-year U.S. Treasurys currently yield more than 1.5%. Compared with the negative sovereign yields in Europe or Japan, that's downright generous.

Naturally, you might assume capital from those countries would flow into the U.S. Treasury markets instead. But that may not be the case any longer.

You see, while U.S. Treasurys still boast relatively big yields compared to the rest of the world's sovereign debt, there's another factor to consider: currency markets. Foreign investors in U.S. Treasurys often "hedge" for changes in the dollar… and this has a cost. Here's more from Bloomberg…

For Kaoru Sekiai, getting steady returns for his pension clients in Japan used to be simple: buy U.S. Treasurys. Compared with his low-risk options at home, like Japanese government bonds, Treasurys have long offered the highest yields around… It's been a "no-brainer since forever," said Sekiai, a money manager at Tokyo-based DIAM Co., which oversees about $166 billion.

That truism is now a thing of the past. Last month, yields on U.S. 10-year notes turned negative for Japanese buyers who pay to eliminate currency fluctuations from their returns, something that hasn't happened since the financial crisis. It's even worse for euro-based investors, who are locking in sub-zero returns on Treasurys for the first time in history.

In other words, after accounting for the rising cost of hedging, the relatively large yields of U.S. Treasurys disappear for many foreign investors. As Jeffrey Rosenberg, chief investment strategist at fixed-income giant BlackRock, noted to Bloomberg…

People like a simple narrative. But there isn't a free lunch. You can't simply talk about yield differentials without talking about currency differentials.

According to Ben Lord, portfolio manager at M&G Limited, this leaves higher-yielding U.S. corporate bonds as the "only game in town" for foreign income investors.

Bloomberg notes foreign investors already own 40% of outstanding U.S. corporate debt, an increase of 5% in just the past year. Don't be surprised if this number moves even higher in coming months as the reach for yield continues.

Of course, regular readers know we think these folks are making a serious mistake. Despite their relative attractiveness, corporate-bond yields remain near record lows... Meanwhile, credit downgrades and defaults are quietly soaring.

As the credit-default cycle begins to ramp up, these investors will discover they've taken on much more risk than they realized in pursuit of a little extra yield. Make sure you're not one of them.

New 52-week highs (as of 8/30/16): American Financial (AFG), Aflac (AFL), Becton Dickinson (BDX), Berkshire Hathaway (BRK.B), CME Group (CME), Western Asset Emerging Markets Debt Fund (ESD), iShares Core S&P Small-Cap Fund (IJR), Nuveen Floating Rate Income Opportunity Fund (JRO), Ritchie Bros. Auctioneers (RBA), Gibraltar Industries (ROCK), and Invesco High Income Trust (VLT).

In today's mailbag, several subscribers tell us how they're handling the "mini panic" in gold. Send your questions and comments to feedback@stansberryresearch.com. As always, we can't respond to every e-mail, but we read them all.

"Have trailing stops in on Large Producers/Royalties and Gold in Ground and not worried. Buy the bullion 2x/year so a slight price decrease is opportunity." – Paid-up subscriber Mike H.

"What gold panic? If people are worried about a 3% movement then they should not be investing in that asset. My thought, which I think you also share, is that precious metals are insurance if stocks, bonds and paper money, and other normal financial assets become worthless." – Paid-up subscriber William E.

"Hi, Sold out nearly all positions two weeks ago. Made a nice profit following your recommendations... In my view, there will be an opportunity across a broad spectrum of stock market sectors to invest and position in the next 60 days at lower values then are currently offered. I believe patience will be the greatest asset one can have so a near all cash position is best for me. Thank you for all your excellent analysis and recommendations and I look forward to examining all input in the weeks ahead." – Paid-up subscriber Gary F.

"I wasn't quite prepared for the pullback, but as you say it was due for a correction and I'm trusting that it's not a sign of a continuing downtrend. I hold more of these types of stocks/ETFs than most people but it's been a good ride so far. I'm reading your reports regularly and will follow any advice regarding next month's important events as noted in your reports and others I've been reading.

Keep the news coming. I rely on it for important events and possible changes in the market." – Paid-up subscriber David G.

Brill comment: David, we're happy to hear you've done well, but your comment about holding "more of these types of stocks/ETFs than most people" makes us nervous.

Of course, individual risk tolerance varies, and you're free to do as you please. We'll just remind you that our Stansberry Gold & Silver Investor service provides explicit position-sizing and stop-loss guidance for a reason. If you ignore proper risk management, you do so at your own risk.

"I am that guy that went 'all in' on your gold and silver stocks and coins. I did take about 20% off the table at the high this summer but I'm still not enjoying watching the thousands of paper profits sucked out of my account on this little pullback. I fear the damage is not yet over, but I am hanging in there for the long run 3 Years or so down the road. I will not be that guy who can't take it any more and sells at the bottom as I've been down before (not surprising given my 'investment' style of plunging and going all in). Let me be a lesson to everyone out there: DIVERSIFY. And that doesn't mean buying 20 different gold stocks like I have. Oh the humanity." – Paid-up subscriber Mat R.

Brill comment: Are you listening, David?

"Can you tell me why you say there's a 10% correction... even a 25% correction and I'm down 50-60% in gold stocks, silver stocks and the mining stocks you recommended? The numbers you're sharing and the ones I'm experiencing don't add up at all!" – Paid-up subscriber Therese K.

Brill comment: Unfortunately, we can't... We know you're a Stansberry Gold & Silver Investor subscriber. Yet only one of that service's recommendations has declined more than 30% from its 2016 highs. Most have fallen less than 20%. And all but two of those recommendations are still solidly in the black, for an average weighted return of 28%. What did you buy?

Regards,

Justin Brill
August 31, 2016
Baltimore, Maryland