Rising Bond Yields Are A Threat To Stocks

U.S. bond yields are topping a key measure of the dividends that large U.S. companies pay.

Rising bond yields mark a shift that has broad implications for investors who have viewed higher stock yields as underpinning the bull market.

At 2.50%, the yield on the 10-year U.S. Treasury note has exceeded the 1.91% dividend yield on the S&P 500.  The dividend figure reflects annualized payouts by companies as a proportion of their current share price.

Rising bond yields generally send a signal that the economy is healthy and that demand for goods and services is rising.  However, increases in long-term yields over time also shift investor preferences.  Recently investors have been strongly skewed in favor of stock investments.

The bond yield-dividend yield comparison has been a crucial argument favoring stocks.  Comparing the yield on a company’s stock or a market index with the Treasury rate showed higher dividend yields made stocks a better bet.  It is an easy shorthand indicating investors could receive higher returns even if share prices decline.

The calculus has been distorted in recent years by economic and policy changes since the financial crisis.  Slow economic growth and bond buying from the Federal Reserve have driven bond yields sharply lower.

If rising bond yields are “a signal of higher inflation in the future, it may be a bad sign for all financial assets.”  This according to Aswath Damodaran, a professor at New York University’s Stern School of Business. “I am not sure that I’m ready to tag it yet.”

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