A Tale of Three Spreads
I’m not talking about a mezze platter. In this macro-obsessed environment, I want to take a moment to focus on some less headline-worthy market indicators that can be important guideposts. We talk about the spread between two-year and 10-year Treasuries so often that I’m purposely leaving it out in favor of other measures that I think investors should also pay attention to.
The Great Flatsby
The term “flat is the new up” has been thrown around recently in reference to the stock market, but in the case of yield curve spreads, flat is not usually a good thing. A less widely covered Treasury spread is one called the “near-term forward spread”. It represents the spread between the current yield on a three-month Treasury bill, and the market’s expectation of the three-month yield 18 months from now (the implied forward rate).
In other words, it reflects the 3-month rate today vs. the expected 3-month rate in a year and a half.
Why does it matter? Because it serves as an indicator of when the market thinks the Fed may have to cut interest rates — likely due to economic stress or recession. Specifically, if markets expect in 18 months the three-month yield will be lower than it is today (i.e., inverted), that implies the Fed is likely to cut rates at some point in the next 18 months.
This spread is not inverted currently, but it’s narrowing fast and has come down by almost 200 basis points since early April. At the time of this writing, the current three-month rate is 2.47% and the three-month forward rate is 3.22%, making the spread a measly 75 basis points.
Related: How to calculate stock profit
To Kill a Stock-ingbird
Another spread measure of note is one that brings stocks into the conversation. Namely, the spread between the dividend yield on the S&P 500 and the 10-year Treasury yield. This is interesting to look at because it attempts to isolate “income” as a driving decision factor.
There are multiple forces behind both of these yield measures, which are beyond the scope of this piece, but the main takeaway is that after many, many years of bonds not offering much yield at all, they now offer a more attractive yield than dividend paying stocks, and by a pretty wide margin.
Obviously, investors buy stocks for more reasons than dividend yield (such as price potential), but this metric can be used as a gauge of relative attractiveness of stocks vs. bonds. Moreover, it indicates that the classic 60/40 portfolio may again offer some benefits. Meaning, the bond portion of an investor’s allocation may now offer more upside than it has in recent years.
Moby Debt
Last, but certainly not least, there are credit spreads. This one shows the stress present in corporate credit markets, which is a critical indicator of risk appetite (the larger the spread, the lower the risk appetite) and fear (larger spread = more fear).
Using the high yield bond yield (risk asset) vs. the 10-year Treasury yield (lower risk asset), we find that the current spread between the two is 5.36%. That compares to 2.70% at the beginning of the year, which means this has almost doubled since January.
Luckily, it’s still nowhere near levels of spring 2020 when the spread hit 10.9%, but the increase this year is notable and worth keeping an eye on. If it widens considerably more, it’s likely to happen in concert with a drawdown in equities, and on the heels of some sort of “bad news” catalyst.
Pride & Prudence
Despite many investors’ wishes that we are near the bottom, and the idea that the market falls first, but also bounces back first, it’s important to heed the messages that the market itself is sending. On balance, the three spreads covered here are not sending an “all clear” message. In fact, they’re suggesting that we still practice prudence. I still believe investors can start to wade back into the market this summer, but I also believe we have some work to do before finding durable upside.
Want more insights from Liz? The Important Part: Investing With Liz Young, a new podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.
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What happens to your personal loans when you die?
What happens to personal loans when the borrower dies? This answer may not be as straightforward as you might think.
Here’s some context. In this post, the term “personal loans” goes beyond the type of installment loan known as a “personal loan” and encompasses loans taken out by a person or people rather than by businesses. It is a complex subject with laws varying by state.
According to the Federal Trade Commission, debts do not in general go away because the debt holder has died. Typically, the debts are paid from the estate of the deceased person.
An estate includes the person’s real estate, cash, financial investments, vehicles and other assets. If there isn’t enough money in the estate, the debts often go unpaid although there are exceptions where someone else is personally responsible for the debt.
Related: Can you use your spouse’s income for a personal loan?
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If someone has a will, it should list an executor. The executor is responsible for paying the deceased person’s debts out of the assets in their estate among other duties. If there isn’t a will, the court may appoint someone as executor or state law may contain a process in which someone becomes responsible for debt settling.
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State laws vary on how debt payments must be prioritized. Most commonly, funeral expenses are first, followed by estate administration costs and then taxes and medical bills. It’s important to seek guidance about state laws where the deceased person lived.
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In community property states, a spouse may be personally responsible for outstanding debts and, in some states, other laws exist that make a spouse responsible for certain types of debts, such as healthcare expenses.
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People who can inherit debt include the following.
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If you cosigned for someone’s debt and that person dies, you are typically responsible for that debt. This is not usually the case if you’re an authorized user on an account, such as a credit card.
If a debt collector tells you that you were a cosigner, but you believe that you were an authorized user only, the Consumer Financial Protection Bureau notes that you can ask the debt collector for evidence.
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The situation for jointly held debt owners is similar to that for cosigners. If you were on a joint account with someone who passed away, you remain an account holder and will likely be responsible for debt payments.
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If you were in a position where you were legally responsible for handling the debt, such as an estate’s executor and you didn’t follow proper procedures, you might find yourself legally obligated to pay the debt.
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As noted, spouses living in community property states may be required to pay off a deceased spouse’s debts through commonly held assets. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin—and Alaska, if spouses chose this method of property owning.
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The type of debt can play a role in how it’s handled. Loan types include the following.
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Cosigners and joint credit card holders will almost certainly be held responsible for credit card debt. If the deceased person had an individual account, then it would largely depend upon whether they lived in a community property state or not.
In a community property state, credit card debt is considered to be jointly held. In common law property states, the debt shouldn’t typically pass on to someone else.
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First, some context: Mortgages typically have a due on sale clause that means the loan must be paid in full before ownership can change hands; this isn’t applicable, though, if it’s transferred to an heir after a borrower’s death. (As with other kinds of debt, cosigners and co-borrowers would still owe the debt.)
If someone else inherits the house and is not a cosigner or co-borrower, then federal law allows the beneficiary to take over the mortgage—and the mortgage servicer must allow that, even if the person would not typically qualify for that mortgage loan.
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If someone inherits a home where there is a balance on a home equity loan, that debt is typically inherited, as well. If multiple heirs each inherit a share of the home, the situation becomes more complicated and you may want to get legal advice, especially if there is disagreement among heirs about how to proceed.
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In general, the deceased’s estate will pay for medical bills with exceptions, including when there is a cosigner or it’s a community property state. More than half of the states also have something called filial responsibility laws. This means that adult children can be held responsible for supporting their parents who can’t afford to support themselves. This law is rarely enforced but is worth noting.
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Car loans should generally be paid off by the estate. If there aren’t enough funds (and there’s no co-signer and it’s outside of a community property state), then the person inheriting the vehicle can make payments. If that doesn’t happen, then the lender may repossess the vehicle, sell it, and return any excess funds over the outstanding loan amount to the estate.
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Federal student loans will be discharged (considered paid in full) on the date of the borrower’s death. This applies to federal loans taken out by the student as well as parent PLUS loans taken out by a student’s parent.
Private lenders, however, are not legally required to cancel student loans upon death, so the executor should check the agreement to see what terms and conditions are.
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Personal loans also pass onto the estate where they can be paid through the deceased person’s assets. Cosigners/co-borrowers/spouses in a community property state can still be liable for that debt. (Here’s more information about what a personal loan is and the different types of personal loans.)
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In this section, we’re once again using the term “personal loans” to mean a non-business debt, which may or may not be a personal loan as the phrase is typically used.
If the debt is on record, meaning that there is a contract involved, the borrower would typically still owe the money. It would become an asset in the deceased person’s estate and there could still be consequences for the borrower if the debt is not paid.
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You can ask to see a copy of the contract, which would allow you to see the specifics of a loan agreement.
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If a transfer of money occurs with the expectation of repayment, that is considered a loan that should be paid back. If there is a question about whether something was intended as a loan or as a gift, from a legal standpoint, there should be evidence that can be presented to show that it was a loan. If there isn’t enough evidence, the court will often consider it a gift.
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Why get a personal loan? There are plenty of reasons to apply for a personal loan, including to pay legal expenses associated with estate planning. These loans can be unsecured or secured (collateralized loans). If it’s the latter, here’s what can be used as collateral for a personal loan. These installment loans come with a specified interest rate and term with payments calculated so that you pay it off in full during the loan’s term. If you find that you didn’t need as long of a term, here’s information about paying personal loans early.
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In general, when a borrower dies, the situation is handled through the person’s estate, with cosigners, co-borrowers and spouses in community property states having responsibility for most kinds of debts. When a lender dies, the borrower typically still owes the money. Individual situations can become quite complex, so it makes sense to reach out for legal help
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You can compare rates for personal loans at Lantern by SoFi.
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