The topsy-turvy world of stock and bond yields

published 6 September 2019

Negative bond yields are "scrambling... basic assumptions of financial markets," says John Authers on Bloomberg. The dividend yield of the S&P 500 index is now higher than the yield on the 30-year US Treasury bond. That hasn't happened since the financial crisis. Yet back then the so-called "yield gap" closed because of plunging stock prices. This time the 30-year bond yield that has plunged as debt prices have rocketed.

The yield gap between equities and bonds reversed some time ago in UK markets, and now America has followed the trend, says Jeremy Warner in The Daily Telegraph. Stock investors need less protection against inflation than bond investors because companies can grow profits and dividends, while a bond coupon remains fixed. So the post-war norm has been for equities to yield less than bonds. Some see the latest development as a stockmarket buying opportunity. But if a recession is looming then dividend payouts could be cut.

That should not deter investors from taking a look at the UK market, says Siobhan Riding in the Financial Times. The average UK dividend yield rose to 4.8% in 2018, a 29-year high according to Link Asset Services. Over the next 12 months FTSE 100 companies should yield 4.4%. Even during the 2008-2009 recession, UK dividends only fell by 14% from peak to trough. Thus, even pricing in the risks, the yields on offer look attractive.