Goodbye TINA, hello BOB. With the 10-year Treasury yielding nearly 5.1%, bonds may provide investors a competitive alternative to stocks.
Goodbye TINA, Hello BOB. For most of the past two decades, investors seeking returns had to rely more heavily on stocks than bonds. The Federal Reserve kept interest rates abnormally low following the Great Financial Crisis to support the economy.
This phenomenon was known as TINA, or “There Is No Alternative.” Stocks offered a 5%+ earnings yield, plus growth, versus a yield below 3% on the 10-year Treasury.
Goodbye TINA, Hello BOB: Bonds Offer Benefits
Well, things have changed quickly.
Goodbye TINA and hello BOB, or “Bonds Offer Benefits.”
The 10-year Treasury now yields nearly 5.1%, slightly below the S&P 500’s forward earnings yield of 5.3%.
For the first time in more than twenty years, bonds may offer a competitive alternative to stocks.
Comparing Stocks and Bonds: Understanding Earnings Yield
Figure 1 compares the 10-year Treasury yield with the S&P 500’s earnings yield.
Because stocks do not pay a fixed rate of interest like bonds, earnings yield provides a way to compare stocks and bonds.
Earnings yield shows how much profit S&P 500 companies are expected to generate relative to their market value.
For example, a 5.3% earnings yield means S&P 500 companies are expected to generate about $5.30 of earnings for every $100 of market value.
When the line in Figure 1 is above zero, the stock market’s earnings yield is higher than the 10-year Treasury yield. When it falls below zero, Treasury yields are higher than the earnings yield.
For most of the period since the early 2000s, stocks held a sizable yield advantage. Today, that advantage is much smaller.
Why Treasury Yields Have Increased
Figure 2 shows that the shift has come almost entirely from higher Treasury yields.
The S&P 500’s current forward earnings yield of 5.3% is slightly higher than its 5.2% average over the past decade.
In contrast, the 10-year Treasury now yields around 5.1%. That is about 2.2 percentage points above its 10-year average of 2.9%.
Treasury yields started rising in 2022 as the Federal Reserve aggressively raised interest rates to bring inflation under control.
More recently, Treasury yields have remained elevated as investors weigh several factors. These include persistent inflation, the possibility of additional Fed rate hikes, growing federal deficits, and heavy government borrowing.
Figure 1: Equity Risk Premium (Stocks vs. Bonds) | Figure 2: Today vs. 10-Year Historical Average
What Higher Bond Yields Mean for Investors
The charts do not necessarily signal that bonds will outperform stocks. Higher Treasury yields also come with their own risks.
Bond prices can fall when interest rates rise (aka yield up, price down). In addition, inflation can reduce the purchasing power of the income that bonds provide.
Stocks also offer the potential for corporate earnings to grow over time. This is one of the main reasons investors own them for long-term growth.
Goodbye TINA, Hello BOB: The Bottom Line
Bottom line, for the first time in years, investors may have more options than just stocks to pursue returns.
We believe a 5.1% yield on a U.S. Treasury bond may provide an attractive starting point for portfolio construction.
Learn more about FAS Wealth Partners and our approach to investment management.
Disclosures
Investment Advisory Services offered through FAS Wealth Partners, a Registered Investment Adviser with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. FAS Wealth Partners’ articles and associated links offer news, commentary, and generalized research, not personalized investment advice. Nothing in this article should be interpreted to state or imply that past performance is an indication of future performance. All investments involve risk and, unless otherwise stated, are not guaranteed. Securities may be offered through FAS Corp, an SEC registered broker-dealer and member of FINRA. FAS Corp is an affiliate of FAS Wealth Partners.
After 25 years in its Overland Park office, FAS Wealth Partners is preparing for a new chapter at Park Place in Leawood, Kansas. Learn more about the firm’s new 23,000-square-foot
Goodbye TINA, Hello BOB
Goodbye TINA, Hello BOB. For most of the past two decades, investors seeking returns had to rely more heavily on stocks than bonds. The Federal Reserve kept interest rates abnormally low following the Great Financial Crisis to support the economy.
This phenomenon was known as TINA, or “There Is No Alternative.” Stocks offered a 5%+ earnings yield, plus growth, versus a yield below 3% on the 10-year Treasury.
Goodbye TINA, Hello BOB: Bonds Offer Benefits
Well, things have changed quickly.
Goodbye TINA and hello BOB, or “Bonds Offer Benefits.”
The 10-year Treasury now yields nearly 5.1%, slightly below the S&P 500’s forward earnings yield of 5.3%.
For the first time in more than twenty years, bonds may offer a competitive alternative to stocks.
Comparing Stocks and Bonds: Understanding Earnings Yield
Figure 1 compares the 10-year Treasury yield with the S&P 500’s earnings yield.
Because stocks do not pay a fixed rate of interest like bonds, earnings yield provides a way to compare stocks and bonds.
Earnings yield shows how much profit S&P 500 companies are expected to generate relative to their market value.
For example, a 5.3% earnings yield means S&P 500 companies are expected to generate about $5.30 of earnings for every $100 of market value.
When the line in Figure 1 is above zero, the stock market’s earnings yield is higher than the 10-year Treasury yield. When it falls below zero, Treasury yields are higher than the earnings yield.
For most of the period since the early 2000s, stocks held a sizable yield advantage. Today, that advantage is much smaller.
Why Treasury Yields Have Increased
Figure 2 shows that the shift has come almost entirely from higher Treasury yields.
The S&P 500’s current forward earnings yield of 5.3% is slightly higher than its 5.2% average over the past decade.
In contrast, the 10-year Treasury now yields around 5.1%. That is about 2.2 percentage points above its 10-year average of 2.9%.
Treasury yields started rising in 2022 as the Federal Reserve aggressively raised interest rates to bring inflation under control.
More recently, Treasury yields have remained elevated as investors weigh several factors. These include persistent inflation, the possibility of additional Fed rate hikes, growing federal deficits, and heavy government borrowing.
For additional information about interest rates and monetary policy, visit the Federal Reserve’s monetary policy page.
What Higher Bond Yields Mean for Investors
The charts do not necessarily signal that bonds will outperform stocks. Higher Treasury yields also come with their own risks.
Bond prices can fall when interest rates rise (aka yield up, price down). In addition, inflation can reduce the purchasing power of the income that bonds provide.
Stocks also offer the potential for corporate earnings to grow over time. This is one of the main reasons investors own them for long-term growth.
Goodbye TINA, Hello BOB: The Bottom Line
Bottom line, for the first time in years, investors may have more options than just stocks to pursue returns.
We believe a 5.1% yield on a U.S. Treasury bond may provide an attractive starting point for portfolio construction.
Learn more about FAS Wealth Partners and our approach to investment management.
Disclosures
Investment Advisory Services offered through FAS Wealth Partners, a Registered Investment Adviser with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. FAS Wealth Partners’ articles and associated links offer news, commentary, and generalized research, not personalized investment advice. Nothing in this article should be interpreted to state or imply that past performance is an indication of future performance. All investments involve risk and, unless otherwise stated, are not guaranteed. Securities may be offered through FAS Corp, an SEC registered broker-dealer and member of FINRA. FAS Corp is an affiliate of FAS Wealth Partners.
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