Investors are leaving stocks for the allure of risk-free payouts in bonds
A Treasury rout that pushed 10-year yields close to the highest since 2007 has spurred what is now the biggest break in an $8 trillion equity rally that had sent the Nasdaq 100 up as much as 45% in 2023. Major US benchmarks just slid in a third straight week for the first time since December. While debate rages over why the bond market has turned dangerous again right now — inflation, Federal Reserve policy and the growth outlook are all in the mix — the issue for equity investors is less abstract.
Rising risk-free payouts are getting too rich for many to turn down, particularly compared with expected returns in loftily priced stocks. One metric in particular tells the story, a valuation lens known variously as the Fed model or equity risk premium. It shows the profit yield on S&P 500 shares — a rough proxy for return prospects that is the reciprocal of the price-earnings ratio — falling to its lowest level versus bond yields in nearly two decades.
That’s chasing a growing number of investors away from shares. One is Ulrich Urbahn, Berenberg’s head of multi-asset strategy, who has been buying fixed income to lock in high yields while gradually decreasing equity exposure. “Given rising real yields and ambitious valuation levels in particular for US stocks, we think that the risk-reward looks better for bonds,” said Urbahn, who has been increasing his flexible fund’s allocation to fixed income to 50% from 30%.
Of course, the question of what’s bugging the bond market is also relevant to share investors, who were counting on a soft landing in the economy to justify their exuberance. Most straightforwardly, it’s concern that Jerome Powell’s Federal Reserve will keep pushing up rates to fight inflation. Minutes from July’s
. Read more on economictimes.indiatimes.com
