Many investors have avoided bonds as lower 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 ten-year Treasury yield jumped 9 basis points to a high above 1.49% on Thursday, reaching its highest level since February 2020. The rise placed the benchmark rate for on the dividend yield of the S&P 500, which stood at around 1.43%, according to data set calculations based on payments over the past twelve months.
The milestone is important for large investors who monitor the valuations of all assets, as Treasuries are considered the risk-free rate, so it means that equities have lost their premium over the bonds, even though they are riskier values. Thursday’s move intensified fears that a rotation out of stocks and toward bonds would accelerate as higher rates make large-flight stocks less attractive.
Bond yields have risen sharply this month, with a ten-year rate gaining more than 35 basis points. The advance was motivated by expectations of strong economic growth and a rise in inflation.
“The history of interest rates since March 2020 has played an important role in increasing risky assets in all asset classes with optimism ahead of the broader economic recovery,” Gregory said. Faranello, head of U.S.-type trading at AmeriVet Securities. “A continued rise in long-term U.S. rates will present a value proposition at some point, especially if we have the opposite of 2020, with returns that now reduce risk assets and reduce broader financial conditions.”
Many strategists cited rising yields as the culprits for the weakness of technology stocks, as well as increased volatility in the overall market. Higher rates could especially affect the growth-oriented technology sector, as they have benefited from an easy loan.
Yields continued its rally even after Federal Reserve Chairman Jerome Powell downplayed the risk of inflation, saying it could take three years to achieve the central bank’s goal steadily. He said inflation was still “soft” and the central bank has the tools to fight it if it has to go hot.
“Rising yields have been driven primarily by rising inflation expectations,” Joseph Kalish, chief global macro-strategist at Ned David Research, said in a note. “More recently, expectations of better economic growth have boosted real yields and raised inflation and liquidity premiums.”
Dividend yields, calculated as annual payments divided by stock prices, have been declining as the stock market has risen to new highs, and yet companies have not raised the dividend amid 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 rose $ 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 lead over the bonds.
Of course, dividends have become less important in recent years, as high-tech stocks that want to avoid payments have led the market.
And stocks still offer a premium over bonds when profits are taken into account. S&P 500 members will earn $ 172.26 per share this year, analysts say, according to FactSet. This amount divided by the current value of the S&P 500 gives it a yield of the so-called 4.4% profit, which is another way that investors value assets against each other.
– CNBC’s Nate Rattner contributed to this article.
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