- Since 2008 US 10yr T-bond yields have fallen from more than 5% to less than 2%
- German 10 YR Bund Futures have fallen even further from 4.5% to less than zero
- With Central Bank inflation targets of 2%, many bond markets offer little or no real return
- In developed markets the inverse yield gap between dividend and bond has disappeared
Since the end of the great financial recession, bond yields in developed countries have fallen to historic lows. The bull market in stocks which began in March 2009, has been driven, more than any other factor, by the fall in the yield of government bonds.
With the Federal Reserve now increasing interest rates, investors are faced with a dilemma. If they own bonds already, should they continue to remain invested? Inflation is reasonably subdued and commodity prices have weakened recently as economic growth expectations have moderated once more. If investors own stocks they need to be watching the progress of the bond market: bonds drove stocks up, it is likely they will drive them back down as well.
The table below looks at the relative valuation between stocks and bonds in the major equity markets. The table (second item below) is ranked by the final column, DY-BY (Dividend Yield – Bond Yield), sometimes referred to as the yield gap. During most of the last fifty years the yield gap has been inverse, in other words dividend yields have been lower than bond yields, the chart directly below shows the pattern for the S&P500 and US 10-Year government bonds going back to 1900.
Relative valuation between stocks and bonds
Dividend Yield – Bond Yield
To read the entire report, please click on the pdf below