Bond yields have soared this year amid Federal Reserve tightening, the slump of the past week notwithstanding.
The 10-year Treasury yield rose to a high of 3.5% during the week of June 13. While the yield has slid to 3.03% June 23, it remains far above last year’s finish of 1.51%.
That climb in yield has made bonds more attractive to investors. And Bloomberg presented statistics showing how that attractiveness has increased compared to stocks.
The earnings yield for stocks (earnings per share divided by share price) averages about 5.3%.
That puts the yield gap between stocks and Treasury bonds at the lowest level since 2018, Bloomberg reported June 23 before that day’s slide by bond yields.
Looking at investment-grade bond yields, their yields stood just 45 basis points below the S&P 500’s yield, the slimmest gap since 2010, according to Bloomberg.
This development begs the question of whether stocks or bonds represent a better bargain for investors, given their sharp declines this year. The S&P 500 has suffered a negative return of 21%, and the Bloomberg U.S. Aggregate bond index has slid 11%.
On June 16-17, The Street.com asked five experts that question, and their responses were mixed. Three said equities, one said bonds, and the fifth said neither one.
One of the stock bulls is Mick Heyman, an independent financial advisor. Stocks have a more favorable outlook if the stock and bond markets rise or if they fall, he said.
If the economy weakens because of Fed rate hikes, and it then cuts rates, “the upside for stocks is huge,” he said. But given that the Fed wouldn’t have that much room to cut, as it would be starting with rates at a low level, bonds would rise maybe 3% to 4% a year, Heyman said.
“Can stocks outperform that?” Heyman asked rhetorically. “I say yes.”
If the Fed keeps raising rates, stocks will likely fall, but so will bonds, Heyman said. “Bonds could easily go 10 to 15%,” he said. Even if stocks initially fall further then bonds, stocks have more potential over the long term, he said. Historically, stocks have outperformed bonds.
If you invested $100 in stocks in 1928, it would have been worth $761,711 at the end of 2021, including dividends, according to the calculations of Aswath Damodaran, a finance professor at New York University.
Meanwhile, $100 invested in 10-year Treasury bonds would have produced only $8,527. “For any long period of time you’re better off in stocks,” Heyman said.
Bonds as a Hedge
Meanwhile, Jack Ablin, chief investment officer at Cresset Capital chose bonds as the better bargain. Both stocks and bonds are basically at fair value after their declines, he said.
But, bonds are probably a better deal than stocks now, at least over the next couple quarters, Ablin said. That’s because “bond yields are high enough to serve as a hedge for stocks,” he said.