The Bond Yield of US Banks Became Attractive Thanks to the Oil Plunge
While many decided long ago that this country’s economic woes were over, there have been some disturbing signs that this isn’t necessarily true. Many believe that we’ve simply enjoyed a temporary reprieve which is nearly at its end. Although a lot of this may be speculation, there’s also some well-supported evidence to avoid risky investments and go back to something more reliable like bonds.
A Troubling Report
Recently, another sign was added to the list of reasons to be cautious when the FED, the Office of the Comptroller and the Federal Deposit Insurance Corporation made a joint report at the end of 2015.
Amongst other things, the report outlined how weak loans had risen nationwide by 9.4% in 2015 as compared to the year before. To make matters worse, the report also stated that loans heading towards trouble were up 18.5%.
Neither of those signs should inspire confidence, but it might actually get worse.
Oil and Gas Companies Named as Culprits
Agency officials largely pointed the finger at oil and gas companies for those troubling numbers. The report also spelled out that some $276.5 billion in loans has been given to the oil producers and service companies. This represents 7.1% of the big loans assessed by the aforementioned federal regulators.
Oil prices have been dropping for some time now and while most people love seeing this when they pull in to fill up their cars, the cost for a gallon of gas takes on a significantly different light when the above loans are mentioned.
Although it’s great that gas prices are down, that means the companies that are receiving these huge loans aren’t making as much profit. Obviously, this could end up hurting their ability to pay back those billions of dollars. In turn, the economy might be in for another major hit, which has resulted in a significant boon to bonds.
The Bond Yield That Followed
Of course, well before the report was published, the credit spreads had been widened. If there was any doubt as to why this had happened, though, the report should have made it quite clear.
As we mentioned at the beginning, while there have been many signs that the U.S. economy is finally on the mend, those who know where to look have seen plenty of reasons to take a much more measured view on the situation.
The natural result has been a bond yield caused by investors who are searching out safe harbor until the storm is truly over. For example, the BofA Merrill Lynch US Corporate Master Effective Yield© rose up to 3.7% by the end of 2015 year from 2.84% in the April of that year.
Worries about rising credit risk of US Bank sectors was a major cause of 20% -30% stock price plunge of major US banks. A financial stocks index erased more than 25% of its gain since March 2009. Failing bonds price of major US lenders, bringing the yield of medium term bond to an attractive level.
For example Wells Fargo (WFC) 3.00% Jan 22, 2021, and JP Morgan (JPM) 2.55% Oct 29, 2020, bonds, which both have YTM close to 2.4%.
This phenomenon wasn’t unique to the U.S. either. Across the border, Canada actually saw the biggest impact related to the plunge in oil prices. Their countries corporate bonds have also experienced a similar yield’s move for this reason, impacted on bonds issued by Canadian major banks in the USA.
A bond of RBC Royal Bank of Canada (RY) 2.50% Jan 19, 2021, provides yield 2.30%, and the bond of TD Bank (TD) 2.5 % Dec 14, 2020, provides yield 2.20%.
Only time will tell if the report we mentioned is the precursor for another recession, but the financial industry is definitely better prepared to meet unfavorable financial conditions.
Despite recent rally and new year-to-date high of S&P 500 index, financial sector is still under pressure. It is still questionable if futures risks have been already priced in banks stocks, but bond yield provided by major banks is definitely on the attractive level.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it . I have no business relationship with any company whose stock is mentioned in this article.
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