It has been a good move in stocks the past two weeks but an awful move in government bonds over that same period. Time to check in and see what the S&P 500 Dividend Yield looks like vs the US 10yr Treasury Bond Yield.
First, the S&P Dividend Yield:
As you can see, it compressed very quickly. That's what happens when the dividend stays the same but the price of the market rises so rapidly. So two weeks ago we sat at 2.23% Dividend Yield and today we sit at 2.12%.
Now compare that to the 10yr US Treasury Bond Yield (apologies, Bloomberg doesn't allow me to overlay the charts):
So the 10yr US bond yield climbed from 1.80% to 2.33%. Yikes.
The obvious conclusion, with some caveats, is:
Interest rates rising so dramatically in such a short period of time has a few implications:
And also, we should have a look at the longer term trend of the US 10yr Bond: The white line is called a trend line and it goes back to 2010. We will call this a "support line" which simply means the 10yr US Treasury Bond yield "should" hold this level (at or around ~2.35%). If not, higher we go. Fundamentally, I think we will see Asset Liability Managers (ALM...life cos and pension funds) start to step in to buy US treasury bonds at these levels. Maybe when 10yrs were at 1.40% this past summer didn't help their immunization of assets to liabilities out much but at 2.35-2.50% it sure helps.
One good thing has happened over the past two weeks...the correlation between government bonds and stocks has started to perform the way it should...inversely correlated. I wrote about this in late September and it was part of the reason we sold some of our long-dated (10yr and 30yr) government of Canada bonds in early September when I noticed something wasn't quite right. Read here: highrockcapital.ca/pauls-blog/correlation-metrics Here it is today with the green shaded in the bottom panel representing inverse correlation (when stocks go up, bonds go down, and vice versa):
I hate being wishy washy and non-committal but we sit and wait. We will watch this support level in US 10yr bonds. We maintain a reasonably defensive posture but within our diversified portfolios. Although we have been under-invested in some global stock indices, we do have some very specific exposure in some Canadian equities and corporate bonds. Speaking of corporate bonds, we do have some very strategic positions in some Canadian High Yield bonds. These bonds are :"Credit" risk, not "Interest Rate" risk like government bonds so they have done quite well over the past two months that government bonds have been getting hurt. Scott wrote a bit about them here: highrockcapital.ca/scotts-blog/canadian-high-yield-bonds-a-very-good-place-to-be-invested
Have a great weekend