The topsy-turvy world of stock and bond yields

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.

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.

Recommended

Bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Cash rich and bored? Be careful what you do with your money
Investment strategy

Cash rich and bored? Be careful what you do with your money

As the pandemic has left many people with more time on their hands but little opportunity to spend, they have been speculating in the markets. But don…
19 Oct 2020
Will fintech change the face of banking?
Alternative finance

Will fintech change the face of banking?

Fancy new apps have become popular for everything from making a payment to buying insurance and shares. Should the big banks be worried? Simon Wilson …
17 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020
Last chance to secure a Bounce Back loan for your small business
Small business

Last chance to secure a Bounce Back loan for your small business

The government’s Bounce Back loan scheme will only run for another six weeks. Act now if you need to take advantage of it.
16 Oct 2020