US government bond yields have surged this month

US bond yields have surged as sticky inflation, resilient growth, and global yield spillovers push investors to scale back expectations for Federal Reserve cuts and price in pauses and higher rates for longer. At the same time, persistent fiscal deficits, heavy Treasury supply, and rising debt sustainability concerns are driving investors to demand extra compensation to own long-term government debt.

While shorter-term rates have risen as well, the move has been particularly notable in long-term Treasuries. This week, the 30-year yield hit its highest level in 19 years.

Utility yields premium is dissipating

Inflation has started to erode the competitiveness of the utilities sector's dividends. For the first time in at least 30 years, utilities' inflation-adjusted dividend yield has turned negative.

While yields are still attractive at a median of 3.1% compared with the rest of the market, the sector’s yield premium is dissipating. Utility yields had as much as a 200-basis-point premium to the 10-year U.S. Treasury in August 2021. That has fallen to 29 basis points as of April 28, the smallest since November 2018.

U.S. bonds fall out of sync with record-setting S&P 500

Signals from the U.S. bond market indicate the S&P 500 Index is due for “a reset,” according to Steven Vannelli, chief investment officer of Knowledge Leaders Capital LLC. Vannelli, also the firm’s founder and chief executive, raised the issue in a blog post Thursday. 

He cited gaps in yield between investment-grade and high-yield debt and U.S. Treasuries, as compiled by Bloomberg. Both spreads widened because of falling bond prices since early July, while the S&P 500 set records repeatedly. There have been 49 new highs this year.

Energy stocks, Treasury yields send U.S. inflation signal

Energy stocks and Treasury securities are sending similar signals about the U.S. inflation outlook, according to Michael Hartnett, Bank of America Corp.’s chief global investment strategist. He cited gains among “energy laggards,” specifically Occidental Petroleum Corp., and higher Treasury yields in a report Friday. The chart makes a wider comparison between the S&P 500 Energy Index and the yield on 10-year notes, which have both worked their way higher since March. “Trends say higher inflation,” Hartnett wrote, and commodities and other real assets are reaping the benefits.

S&P 500 revisits '80s by tumbling relative to Treasuries

U.S. stocks have gone through their biggest bout of weakness relative to Treasury securities in decades, according to a barometer cited by Talley Leger, a senior investment strategist at Invesco US. The indicator is the ratio between the S&P 500 Index and the reciprocal of the 10-year Treasury’s yield, which he presented in an April report on market gauges. The ratio started this month by closing at its lowest level since 1983 after tumbling 85% from a high in October 2018. A rebound is needed for stocks to recover, Leger wrote.

 

Record-low Treasury yield gives S&P 500 utilities more appeal

Utility stocks have more to offer income-seeking investors now that the yield on 10-year Treasury notes has set a record low. The S&P 500 Utility Index’s dividend yield surpassed the Treasury yield by more than 200 basis points Tuesday, when the latter fell below 1% for the first time, according to data compiled by Bloomberg. The yield gap rose above the threshold Friday for the first time since June 2013, and then narrowed Monday as stocks rallied. Utility and 10-year yields diverged after coming within 8.5 basis points of each other in November 2018. Each basis point equals 0.01 percentage point.

S&P 500 utility stocks lack power as Treasury alternative

Investors seeking a haven in U.S. utility stocks stand to gain relatively little by comparison with going into Treasury securities. The gap between the S&P 500 Utilities Index’s dividend yield and the 10-year Treasury note yield stood at 0.84 percentage point as of Monday, according to data compiled by Bloomberg. That’s well below the average spread of 1.37 points since the S&P 500 Index entered a bull market in March 2009. To be sure, the gap shrank to less than 0.1 point last November, when it reached the lowest level since 2008.

S&P 500 loses yield advantage over 3-month T-bills

Investors looking for income have more incentive to cast aside U.S. stocks for Treasury bills than they have in the past decade. The S&P 500 Index closed last week with a dividend yield of 1.89 percent, or 1 basis point less than the bond-equivalent yield on three-month bills. Friday was the first day since February 2008 when the S&P 500 had a lower yield, based on payouts for the past 12 months. Each basis point amounts to 0.01 percentage point.

Treasury yield's gap to S&P 500 payouts cause concern

Treasury yields are reaching a point at which “bonds can challenge stock returns,” David Templeton, a money manager and principal at Horan Capital Advisors LLC, wrote Monday in a blog posting. Templeton cited the gap between the yield on 10-year notes and the dividend yield on the S&P 500 Index, which topped one percentage point last month for the first time since January 2014. The potential for the spread to widen further “will serve as a headwind for stocks,” he wrote. 

REITs fall out of line

Shares of real estate investment trusts parted company with U.S. Treasuries this year after tracking them since 2012. The FTSE NAREIT Equity REIT Index fell as much as 8.5 percent relative to the S&P 500 Index on a total-return basis, including dividends, through Monday. Ten-year Treasury notes rose in the period, reducing their yields as much as 13 percent. 

Doug Ramsey, chief investment officer at Leuthold Group LLC, highlighted the contrast in a report Friday. He wrote about the REITs: “What might they do if yields rise?”

 

Gold is `tell' for market volatility to BofA Merrill

“Gold is the ‘tell’” for the next round of financial-market volatility, according to Michael Hartnett, chief investment strategist at Bank of America Corp.’s Merrill Lynch unit. The metal’s price climbed 8 percent from last year’s second-half low, set Dec. 22, through last week. Rising gold prices combined with higher bond yields to foreshadow stock-market slumps in the late 1960s and 1973-1974, as well as the 1987 crash, Hartnett wrote in a report Thursday.

Looking for income? Consider S&P 500 stocks

“Investors ought to look at some stocks as sources of income,” strategists at Bank of America Corp.’s Merrill Lynch unit wrote Tuesday in a report. Sixty-four percent of stocks in the S&P 500 Index had dividend yields that exceeded the 10-year Treasury note’s yield at the end of July, according to data cited by the firm’s Research Investment Committee. Comparable figures from a decade ago were as low as 1 percent.

Market update : treasuries (March 8, 2016)

The bond market can provide clues as to stock market performance. After all, if a dollar goes into bonds, that's a dollar that can't find its way into equities. So it's usually a good idea to follow the technical action in treasuries. The 20 year treasury bond fund (TLT) remains in a bullish wedge pattern, but is currently testing trendline resistance. If you're bullish equities, failure at this trendline is what you're looking for.

A bullish breakout in the TLT would be further indication of traders' preference for defense and safety, normally not the type of environment for equities to flourish.

Update 3 days later:

Stock-bond ‘disconnect’ favors U.S. equities

 “A significant disconnect” between stock valuations and bond yields in the U.S. has made equities relatively cheap, according to Binky Chadha, Deutsche Bank AG’s chief global strategist.

     

The chart shows the comparison he used to reach this conclusion. The projected price-earnings ratio for the Standard & Poor’s 500 Index, as compiled by Bloomberg, is depicted along with the yield on 10-year Treasury notes.

     Ten-year yields would have to rise about 120 basis points to track the estimated P/Es as they did during the first three quarters of 2011, Chadha wrote in an April 5 report. Each basis point amounts to 0.01 percentage point. The government security yielded 2.04 percent as of yesterday.

     The differential primarily reflects the Federal Reserve’s plan to keep its benchmark interest rate close to zero at least through late 2014, in his view.

     “The Fed’s outlook for unemployment and inflation is therefore key” in determining when the gap might close, Chadha wrote. Policy makers for the central bank are scheduled to meet on April 24-25.

     Stocks are a bargain with the S&P 500 at about 13 times analysts’ projected earnings for this year, the New York-based strategist wrote. He cited a December report in which he called the index fairly valued at 15.4 times future profit.