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Bonds were shunned by many investors because low rates made them unattractive compared to stocks. On Thursday, the bond market may have gained the upper hand in the eyes of some investors.
The 10-year Treasury yield jumped 9 basis points to peak above 1.49% on Thursday, reaching its highest level since February 2020. The spike put the benchmark rate above the yield the S&P 500 dividend, which stood at around 1.43%, according to FactSet’s calculations based on payments over the past 12 months.
This milestone is important for large investors who watch the valuations of all assets, as Treasuries are considered the risk-free rate, which means stocks have lost their premium over bonds, while still being securities. more risky. Thursday’s decision heightened fears that a turn from stocks to bonds could accelerate as higher rates make high-end stocks less attractive.
Bond yields rose sharply this month, with the 10-year rate gaining more than 35 basis points. This increase was driven by expectations of stronger economic growth as well as a pickup in inflation.
“The history of interest rates since March 2020 has played an important role in increasing risk assets across all asset classes with optimism for the broader economic recovery,” said Gregory Faranello, manager trading in US rates at AmeriVet Securities. “A continued rise in long-term US rates will present a value proposition at some point, especially if we are facing the opposite of 2020, with yields now leading to lower risk assets and tighter broader financial terms.”
Many strategists have cited the surge in yields as the cause of the weakness in tech stocks as well as the increased volatility in the market in general. Higher rates could hit the growth-oriented tech sector particularly hard, as it benefited from the ease of borrowing.
Yields continued to rally even after Federal Reserve Chairman Jerome Powell downplayed inflation risk, saying it would take three years to consistently meet the central bank’s target. He said inflation was still “soft” and the central bank has the tools to fight it if it were to get hot.
“The rise in yields has been mainly driven by rising inflation expectations,” said Joseph Kalish, chief global macro-strategy strategist at Ned David Research, in a note. “More recently, expectations of better economic growth down the road have pushed real yields higher and higher inflation and liquidity premiums.”
The dividend yield, calculated by dividing annual payments by stock prices, has fallen as the stock market has reached new highs and yet companies haven’t raised their dividends much amid the pandemic.
S&P 500 dividends fell $ 42.5 billion in the second quarter of 2020, followed by another decline of $ 2.3 billion in the third quarter, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices . Payments rebounded $ 9.5 billion in the fourth quarter of last year as businesses survived the worst of the health crisis.
If Corporate America could continue to increase its dividends, which would increase the overall dividend yield, the stock market could regain the advantage over bonds.
Granted, dividends have become smaller in recent years, as high-tech stocks that largely avoid payments have dominated the market.
And stocks always offer a premium over bonds taking into account profits. Members of the S&P 500 will earn $ 172.26 per share this year, analysts estimate, according to FactSet. That amount divided by the current value of the S&P 500 gives it a so-called profit return of 4.4%, which is another way for investors to value assets against each other.
– CNBC’s Nate Rattner contributed to this article.
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