Bonds have been avoided by many investors because lower rates have made them unattractive to equities. On Thursday, the bond market may have gained an advantage in the eyes of some investors.
The 10-year Treasury yield jumped 9 basis points to a high of more than 1.49% on Thursday, hitting its highest level since February 2020. The spike placed the benchmark above the S&P 500 dividend yield, which stood at at about 1.43%, according to FactSet Calculations based on payments over the past 12 months.
The benchmark is important for large investors who monitor valuations between assets, as treasuries are considered the risk-free rate, so it means that the shares have lost their first bond, but are riskier securities. Thursday’s move intensified fears that a stock and bond rotation would accelerate, as higher rates make high-flying stocks less attractive.
Bond yields rose sharply this month, with the 10-year rate gaining more than 35 basis points. The advance was driven by expectations for stronger economic growth as well as rising inflation.
“The March 2020 interest rate story played a significant role in raising higher risk assets between asset classes, with optimism ahead of the broader economic recovery,” said Gregory Faranello, head of US rate trading at AmeriVet Securities. “A continued rise in long-term US rates will present a value proposition at some point, especially if we have the opposite of 2020, with yields now leading to lower risk assets and broader financial conditions.”
Many strategists have cited rising yields as the culprit for weak technology stocks, as well as increased volatility in the wider market. Higher rates could affect the growth-oriented technology sector, in particular because they have benefited from light lending.
Yields continued to rally even after Federal Reserve Chairman Jerome Powell downplayed the risk of inflation, saying it could take three years to reach the central bank’s target consistently. He said inflation was still “weak” and that the central bank had the tools to fight it if it were to heat up.
“Yield growth has been driven primarily by rising inflation expectations,” said Joseph Kalish, chief macro strategist at Ned David Research, in a note. “More recently, expectations of better economic growth on the road have pushed real yields and increased inflation and liquidity premiums.”
Dividend yields, calculated as annual payments divided by share prices, declined as the stock market rose to new highs and yet companies did not raise the dividend much in the wake of the pandemic.
S&P 500 dividends fell $ 42.5 billion in the second quarter of 2020, followed by another $ 2.3 billion decline in the third quarter, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices . Payments returned to $ 9.5 billion in the fourth quarter of last year, while companies survived the worst of the health crisis.
If Corporate America could continue to increase its dividends, which would increase the total dividend yield, the stock market could regain its bond advantage.
Certainly, dividends have become less important in recent years, as high-tech flight actions that largely avoid payments have driven the market.
And the shares continue to offer a premium over bonds when earnings are taken into account. S&P 500 members will earn $ 172.26 per share this year, analysts estimate, according to FactSet. This amount divided by the current value of the S&P 500 gives it a so-called earnings return of 4.4%, which is another way in which investors value assets against each other.
– Nate Rattner of CNBC contributed to this article.
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