As long as the pandemic has happened, governments around the world have spent money to keep their economies keep going and this has produced a great deal of debt. At some point the debt will have to be paid down, but when countries begin to make progress in the countrywide vaccination program, traders have started to be concerned about inflation.
In an article by Lewis Krauskopf of Reuters, the yield on the benchmark 10-year Treasury note, climbed to a a one year high of 1.36%. That number is higher than 0%, but in relative terms it is still quite low and will remain low as determined by the Federal Reserve. There are whispers will rates go higher?
Eric Freedman, chief investment officer at US Bank Wealth Management, noted the theory is when government bond yields rise, all asset price should reprice lower, Mr. Freedman believes yields have not risen high enough to provide a competitive alternative to stocks.
BofA Global Research surveyed fund managers and they showed a record in the net percentage of investors taking higher than normal risk, cash allocations at the lowest levels since March 2013. Allocations to stocks and commissions at their highest level in about a decade.
Analysts at Citibank and Nomura believe if the 10 Year Treasury went higher than 1.5% stocks could drop 8 -10%.
At 22.2 times its forward price to earnings ratio, the S&P 500’s valuation is well above its long term average of 15.3% according to Refinitiv Datastream.
J Bryant Evans, a portfolio manager of Cozad Asset Management said if the 10 Year Treasury went above 3%, then bonds might start competing more aggressively with stocks.
Linking to dividend paying stocks, if you own dividend paying stocks, your dividend yield is compared to owning the 10 Year Treasury which should have least risk associated with it. There are multiple companies that have been profitable and able to increase their dividends every year. If you are worried, more towards these companies and until interest rates go above 5%, you need not worry. The new Chair of the Fed is not likely to increase rates until after 2022 or the midterms.
There are more questions than answers, till the next time – to raising questions.