The Ceiling For Treasury Yields

As the 10-year Treasury yield rises above the stock market’s dividend yield, there is a debate that suggests this means stocks are a bad place to be. That’s nonsense because stocks have a free cash flow yield. You don’t value a stock just based on the dividends it pays in the current year.

As you can see from the chart below, the 10-year treasury yield was much higher than the S&P 500’s dividend yield from the late 1990s to the late 2000s.

Actually, the treasury yield being higher than the dividend yield is normal. The recent periods where the dividend yield was higher just made buying stocks over the treasury that much better for long term investors. Buying the 10-year bond when it has below a 2% yield is mainly for traders and investors trying to diversify risk. This long term chart also serves to show that the 10-year yield has been above 2% for a lot of the past decade. Let’s not get ahead of ourselves. It wouldn’t be the end of the world if the 10-year yield stayed between 2% and 2.25% in the 2nd half of 2021.

Recent History

If the treasury yield were to spike substantially, many risk stocks would implode and the interest on the Federal debt could become an issue. The Fed doesn’t want to admit that it would stop such a movement because that would impact current markets. The Fed will only comment when it sees the need to put out a fire. Don’t take the Fed’s current words at face value. If the 10-year yield were to rise to 4% in a hypothetical scenario, the Fed would probably intervene depending on the ramifications of that movement.

The chart below is a really interesting way of framing the Fed’s role in potentially affecting the long bond.

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