Greece Will Default: Chart of the Week

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Europe's sovereign debt crisis has roiled markets over the past few months. Investors worry that multiple countries, led by Greece, will default on their bonds -- billions of which are held by banks around the world. As our chart of the week demonstrates, I believe this hypothetical concern will soon become a reality. The issue is no longer if Greece will default, but when.

A textbook yield curve
A yield curve plots the yield, or interest premium, paid by a country on debt of differing maturities. Our government, for example, currently pays interest of 0.03% on a six-month bond, 0.19% on a two-year bond, 2.03% on a 10-year bond, and 3.32% interest on a 30-year bond.

As you can see, the interest rate a government pays generally increases with time. This represents the higher risk of default on a 30-year bond relative to, say, a six-month bond, since there's more time for things to go wrong.

A properly functioning yield curve will accordingly take the following upward-sloping form:

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Source: U.S. Department of the Treasury.

The dreaded inverted yield curve
But Greece's yield curve doesn't follow these rules. As the chart below reveals, its yield is higher on short-term maturities and lower on long-term maturities.

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Source: Bloomberg.com.

Bond traders already assume that Greece will default. And when it does, its short-term bonds will be the first to go -- which explains why the yield on its one-year bond is 130%, whereas the yield on its 30-year bond is a comparatively modest 15%!

What does this mean for you?
The potential for a Greek default has been pushing down bank stocks around the world, including Bank of America (NYS: BAC) , JPMorgan Chase (NYS: JPM) , and Wells Fargo (NYS: WFC) , as investors fear banks' exposure to Greek bonds. An actual default, if and when it comes, could create further bargain opportunities among stocks -- particularly financials.

And should investors flee Greece's collapse by moving into traditional safe havens like Treasuries, gold, and silver, profitability should improve at precious-metal mining companies like Yamana Gold (NYS: AUY) , Silvercorp Metals (NYS: SVM) , Silver Wheaton (NYS: SLW) , and Endeavour Silver (NYS: EXK) .

In either case, investors will be rewarded as much for their temperament as for their intellect. This could be a bumpy ride. To keep an eye on the ups and downs of the stocks discussed above, just click here to add them to your watchlist.

At the time this article was published

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