The bonds have been rejected by many investors, as the minimum rates made them unattractive relative to stocks. On Thursday, the bond market may have gained an edge in the eyes of some investors.
The yield on 10-year Treasuries rose 9 basis points to peak above 1.49% on Thursday, reaching its highest level since February 2020. The increase pushed the benchmark rate above the yield by S&P 500 dividend, which stood at about 1.43%, according to FactSet calculations based on last 12-month payments.
The milestone is important for large investors who monitor asset valuations, as Treasuries are considered the risk-free rate, which means that stocks have lost their premium over bonds, but they are riskier securities. Thursday’s move heightened fears that a shift from stocks to bonds will accelerate as higher rates make high-flying stocks less attractive.
Bond yields have risen sharply this month and the 10-year rate has gained more than 35 basis points. The advance was driven by expectations of stronger economic growth, as well as a rebound in inflation.
“The history of interest rates since March 2020 has played an important role in driving risky assets higher across all asset classes with optimism ahead of the broader economic recovery,” said Gregory Faranello, chief trading officer at US rates on 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 that are now driving risky assets lower and tighter financial conditions.”
Many strategists cited rising returns as the culprit for weak tech stocks, as well as higher volatility in the market overall. The higher rates could particularly affect the growth-oriented technology sector, as they have benefited from easy loans.
Yields continued to climb even after Federal Reserve Chairman Jerome Powell downplayed inflation risk, saying it could take three years to hit the central bank’s target consistently. He said inflation was still “soft” and that the central bank has the tools to combat it if it spikes.
“The rise in yields has been driven primarily by rising inflation expectations,” Joseph Kalish, head of global macro strategy at Ned David Research, said in a note. “More recently, expectations of better economic growth in the future have raised real returns and increased inflation and liquidity premiums.”
Dividend yields, calculated as annual payments divided by share prices, have been falling as the stock market surged to new highs, yet companies haven’t raised dividends much amid the pandemic. .
Dividends on the S&P 500 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 recovered by $ 9.5 billion in the fourth quarter of last year as companies 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.
Dividends have certainly become less important in recent years, as high-tech stocks that largely avoid payouts have led the market.
And stocks still offer a premium over bonds when earnings are taken into account. 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 you a so-called 4.4% earnings yield, which is another way investors value assets against each other.
– CNBC’s Nate Rattner contributed to this article.
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