Real Yields Spike And The Equity Risk Premium Plunges
Mike Zaccardi, CFA, CMT | Sep 26, 2022 11:29
- Positive inflation-adjusted return on default-risk-free Treasuries/corporate bonds
- Higher market rates means a much lower S&P 500 equity risk premium
- Consider asset allocation tweaks but wholesale changes not warranted
Treasury yields have been on a massive advance. While the bond bear market arguably began more than two years ago, it’s just since early August that intense selling has rendered rates to their highest level in 15 years on parts of the curve. What’s more, expected inflation appears to be cooling off despite a much hotter than expected August CPI report.
Treasuries vs TIPS/h2
Investors can compare rates on conventional Treasuries to Treasury-Inflation Protected Securities (TIPS) to get a sense of where inflation goes from here. There’s a handy bear market is that interest rates have surged, not collapsed. That means the cost of capital effectively rises for corporations while the equity risk premium for investors has dropped hard. What a difference a year makes.
Disclaimer: Mike Zaccardi does not own any securities mentioned in this article.
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