The bonds were rejected by many investors, as rock bottom rates made them unattractive in relation to stocks. 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 reach a high above 1.49% on Thursday, reaching its highest level since February 2020. The increase placed the benchmark rate above S&P dividend yield 500, which was around 1.43%, according to FactSet Calculations based on payments over the past 12 months.
The milestone is important for large investors who monitor asset valuations, since Treasury bonds are considered to be the risk-free rate, which means that stocks have lost their premium relative to bonds, although they are riskier bonds. Thursday’s decision heightened fears that the rotation of shares for bonds would accelerate, as higher rates make bullish stocks less attractive.
Bond yields increased sharply this month, with the 10-year rate gaining more than 35 basis points. The advance was driven by expectations of stronger economic growth, as well as accelerated inflation.
“The history of interest rates since March 2020 has played a significant role in increasing risky assets across all asset classes with optimism in the face of the broader real economic recovery,” said Gregory Faranello, head of US rate trading at AmeriVet Securities. “A continued increase in US long-term rates will present a value proposition at some point, especially if we have the opposite of 2020, with yields now reducing risky assets and broader, more restrictive financial conditions.”
Many strategists cited rising yields as the culprit for the weakness of technology stocks, as well as high volatility in the broader market. Higher rates can hit the growth-oriented technology sector particularly hard, as they have benefited from easy loans.
Yields continued to rise even after Federal Reserve Chairman Jerome Powell minimized the risk of inflation, saying it could take three years to reach the central bank’s target consistently. He said that inflation is still “low” and that the central bank has the tools to fight it if it gets hot.
“The rise in yields was driven mainly by rising inflation expectations,” said Joseph Kalish, chief macro strategist at Ned David Research, in a note. “More recently, expectations of better economic growth in the future have increased real yields and increased inflation and liquidity premiums.”
Dividend yield, calculated as annual payments divided by stock prices, has declined as the stock market has risen to new highs and yet companies have not increased dividends much in the midst of the pandemic.
S&P 500 dividends fell $ 42.5 billion in the second quarter of 2020, followed by another $ 2.3 billion fall in the third quarter, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Payments recovered $ 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 overall dividend yield, the stock market could regain the advantage over the bonds.
It is true that dividends have become less important in recent years, as high-tech stocks, which largely avoid payments, have led the market.
And stocks still offer a premium on the 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 the so-called 4.4% profit yield, which is another way for investors to value assets among themselves.
– CNBC’s Nate Rattner contributed to this article.
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