Investors have been plowing money into government bonds, hence the negative yielding debt in Europe and the plunging U.S.10-year Treasury yield (^TNX), which is now just under 1.5%.
But the lower bond yields are actually bolstering the case for owning equities, analysts say.
“Conventional wisdom holds that you invest in bonds for yield and equities for capital appreciation,” wrote Credit Suisse analysts, led by chief U.S. equity strategist Jonathan Golub, in a note to clients. “While this might be true historically, with 10-Year Treasury yields collapsing (to 1.5% from 3.2%) over the past 9 months, stocks now offer the best of both.”
They also point out that the dividend yield of the broader S&P 500 (^GSPC) of 1.9% trounces the 10-year yield.
“That stock yields are higher than bond yields is certainly a strong argument to own U.S. equities,” Nick Colas, co-founder of DataTrek Research told Yahoo Finance. “It won’t protect you from near term volatility, but over a long holding period (years) you should do much better in stocks.”
Recession Risk
The plunge in bond yields, which has also resulted in an inverted yield curve with the 2-year Treasury yield trading above the 10-year yield, has sparked fears of a near-term recession. An inverted yield curve has preceded past recessions.
A recession could throw a wrench into the aforementioned investing play comparing stock yields to bond yields.
“The worst case scenario is that we get a deep recession and companies have to cut their dividends,” Colas added. “That happened after the financial crisis, when the companies of the S&P 500 cut dividends by an aggregate of 25%. If the same were to happen again now, the real yield on the S&P would be 1.5% - which is still the same as Treasuries.”
For context, Yahoo Finance analysis shows American Express (AXP), Visa (V), Microsoft (MSFT), Nike (NKE) and Disney (DIS) are the only components of the Dow Jones Industrial Average (^DJI) that yielded a smaller percentage than the 10-year Treasury.
