Torsten Asmus
The 10-year US Treasury yield briefly surpassed the 5% mark yesterday (October 19), the highest since 2007, before settling at 4.98%, according to Treasury.gov data.
For buy-and-hold investors, the high yield seems compelling, at least relative to to recent years, when interest rates were much lower. But the better question is: How does a 5% return compare to the performance of the US stock market?
The answer depends on several assumptions, starting with the time frame. You can torture stock returns into saying whatever you want by changing the time window, so careful analysis is key here.
As a first step (but far from the last word on the subject), let's compare how the 10-year yield has fared with the 10-year trailing yield of the S&P 500 Index. As the chart below shows, there is a wide variety of results, according to the date.
At the moment, the 4.98% return contrasts with the S&P's 9.3% annualized return over the past 10 years. It's no surprise that stocks outperform the 10-year return, but not always.
But the fact that just over 50% of the 10-year stock market yield can now be locked in risk-free (ignoring inflation) is a big change (in favor of the 10-year bond) compared to recent history. .
One could argue that the implication is that it is time to increase the portfolio's weight in bonds versus stocks, at least for relatively conservative investors.
Actually, the graph above is a bit misleading because it compares data in real time without delays. In other words, you gained 9.3% in the stock market over the last decade, but the 4.98% Treasury yield is forward-looking.
The second chart below adjusts for this by comparing how the 10-year yield at one point in time compares to the S&P 500's 10-year yield over the next decade.
If you had bought and held a 10-year Treasury note a decade ago, you would have earned about 2.6%, well below the 9.3% return on 10-year stocks. How will stocks earn over the next 10 years and how will they compare to the expected 5% return for a 10-year bond today?
Of course, no one knows, since stock performance can and will vary widely. For better or worse, there is no shortage of stock forecasts.
โOver the next three or four months, what can I say? Over the next three or four years, it's hard to say how the market will adjust to all the debt.โ Mario Gabelli says. โBut for the next 30 years? I see returns of 8% to 9% in US stocks.โ
This is in line with CapitalSpectator.com current forecast for US stocks. Deciding whether these estimates will be accurate is another question entirely, so care must be taken.
However, one thing is clear. Government bond yields are substantially more competitive today than in the recent past. It's not a crystal ball, but it's still useful for managing expectations and designing portfolio strategies.
Editor's note: The summary bullets in this article were chosen by Looking Alpha editors.
