Watch this corner of the bond market for a tremendous buying opportunity

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Corporate bond spreads are unusually narrow right now. But that may not last

The current strains in the banking system demonstrated by the collapse of Silicon Valley Bank, Signature Bank and Silvergate Bank have profoundly changed the outlook for markets.

It is too early to predict if this crisis will spiral out of control. One thing is almost always and forever true: When central bankers raise short-term rates dramatically and hastily, the banking system will be stressed. Yield curve inversions over the last half century have coincided with a sharp widening in corporate bond spreads. This is true for both investment grade and high yield debt. And yet, spreads remain narrow.Perhaps, it has something to do with interest rates having gone up so much that overall yields on corporate bonds are simply already attractive enough to appeal to buyers. They are at levels not seen in well over a decade in absolute terms, before factoring in the impact of inflation.

Before jumping to any conclusion that the yield curve has sent a false recessionary signal, however, this crucial fact needs to be pointed out: An inverted yield curve is truly a leading indicator, not a coincident or lagging one. Just because two-year yields are trading above the yield on a ten-year note does not mean that the downturn has begun.

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