The arrival of the pandemic last spring sent investors flooding into the traditional safe haven of government bonds. That sent bond yields, which move inversely to prices, plummeting. By August the US ten-year Treasury was yielding just 0.5%.
Positive vaccine news means bond yields have been ticking back up since the autumn, especially in America. Investors are selling out of government debt instruments to buy into growth opportunities in other asset classes. Rising inflation expectations also mean bond investors demand higher yields as protection against the risk that their income stream is inflated away. Finally, massive US government borrowing increases the supply of bonds in the market, which lowers their prices and raises yields. The 30-year US Treasury bond is back above 2% for the first time since Covid-19 began, says Alexandra Scaggs for Barron’s. The benchmark US ten-year note is now above 1.2%. Rising yields pose a challenge to the equity bull market. They could tempt investors away from shares. Savita Subramanian of Bank of America says 70% of S&P 500 firms pay a higher dividend than the ten-year Treasury at present. That proportion would fall to 40% if the ten-year yield climbs to 1.75%, which could prompt a rush out of stocks.
Investors have long complained that poor bond yields force them into stocks in search of an above-inflation return, says Katie Greifeld on Bloomberg. Yet a recovery this year will raise pressure on the Federal Reserve to end its asset purchase programme and could even lead to talk of interest rate hikes, which will send bond yields higher. The days of Tina – “there is no alternative”– to buying stocks may be drawing to a close.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Where are ISA savers and investors putting their money?With less than three months until the end of the tax year, where are ISA savers and investors putting their money? We look at the latest ISA trends.
-
More than £53 billion held in fixed-rate cash ISAs will mature by April - where should savers move their money?If your fixed-rate cash ISA is maturing soon, we look at the options available to you
-
Why Wise could be worth a lot more than its share price impliesForeign-exchange transfer service Wise has the potential to become the Amazon of its sector – here's why you should consider buying this stock now
-
Can The Gym Group pump up your portfolio?Gym Group was one of the best UK small-cap stocks in 2024 and will beef up your profits this New Year
-
MoneyWeek's five predictions for investors in 2025MoneyWeek's City columnist gazes into his crystal ball and sees five unexpected events in store for investors in 2025
-
How buy-and-build stocks deliver strong returnsBunzl, DCC and Diploma became successful through buy-and-build – rolling up dozens of unglamorous businesses. How does it work and what makes it successful?
-
Singapore Technologies Engineering shows strong growthSingapore Technologies Engineering offers diversification, improving profitability and income
-
Why undersea cables are under threat – and how to protect themUndersea cables power the internet and are vital to modern economies. They are now vulnerable
-
Warren Buffet invests in Domino’s – should you buy?What makes Domino's a compelling investment for Warren Buffet's Berkshire Hathaway, and should you buy the UK-listed takeaway pizza chain?
-
4Imprint makes a strong impression – should you buy?4Imprint, a specialist in marketing promotional products, is the leader in a fragmented field
