Students of
financial markets may have noted a historically unusual event last week.
On Thursday, the
yield on 10-year U.S. Treasury notes briefly matched the dividend yield for the
Standard & Poor’s (S&P) 500 Index. This type of convergence is
uncommon. In normal times, the yield on 10-year Treasuries tends to be higher
than the dividend yield of the S&P 500. Felix Salmon of Axios
explained:
“The 10-year
Treasury note is a risk-free asset: If you hold it for 10 years, you know
exactly how much it's going to return…The S&P 500 dividend yield is
normally lower than the risk-free rate. Investors earn less in dividends than
[they] would holding the same amount of money in Treasury bonds, but they hope that
rising stock prices will make up the difference.”
These, however, are
not normal times.
Throughout much of
2020, the S&P 500 Index offered investors a return comparable to, or higher
than, 10-year Treasuries. Low Treasury yields reflected the Federal Reserve’s
highly accommodative monetary policy, which kept the fed funds rate near zero
to support the economy through the pandemic. Since August 2020, however, the
yield on 10-year T-notes has been creeping higher despite the Fed’s actions.
Last week, it closed at 1.46 percent.
Rising yields
appeared to concern investors last week. Ben Levisohn of Barron’s
reported:
“Usually, we can
point to a big event or a piece of economic data that shook up the market, but
that wasn’t the case this time. The data were solid, with weekly jobless claims
dropping more than expected, durable-goods orders rising more than forecast,
and personal income getting a big boost from stimulus checks sent out in
January…But there was the 10-year Treasury yield.”
Rising Treasury
yields suggest bond investors think the economy is likely to strengthen and
pent-up consumer demand could spark spending on shopping, dining, and social
events. A spending spree could lead to higher inflation, reported Elliot Smith
of CNBC. Rising yields also could signal weak demand for U.S.
Treasuries, according to Levisohn.
Last week, major
U.S. stock indices finished lower.
Data as of 2/26/21 |
1-Week |
Y-T-D |
1-Year |
3-Year |
5-Year |
10-Year |
|
Standard &
Poor's 500 (Domestic Stocks) |
-2.5% |
1.5% |
22.3% |
11.1% |
14.4% |
11.1% |
|
Dow Jones Global
ex-U.S. |
-3.9 |
2.2 |
19.0 |
2.7 |
8.8 |
2.6 |
|
10-year Treasury
Note (Yield Only) |
1.5 |
NA |
1.3 |
2.9 |
1.8 |
3.4 |
|
Gold (per ounce) |
-2.4 |
-7.8 |
6.6 |
9.3 |
7.3 |
2.1 |
|
Bloomberg
Commodity Index |
0.0 |
9.3 |
15.8 |
-1.4 |
2.5 |
-6.4 |
S&P 500, Dow
Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested
dividends (gold does not pay a dividend) and the three-, five-, and 10-year
returns are annualized; and the 10-year Treasury Note is simply the yield at
the close of the day on each of the historical time periods.
Sources: Yahoo!
Finance, MarketWatch, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
Best regards,
Womack Investment Advisers, Inc.
WOMACK INVESTMENT ADVISERS, INC.
Oklahoma / Main Office: 1366 E. 15th Street - Edmond, OK 73013
California Office: 4660 La Jolla Village Dr., Ste. 100 - San Diego, CA
92122
Phone (405) 340-1717 - Toll Free (877) 340-1717
Website: www.womackadvisers.com
Womack Investment Advisers, Inc. (WIA) is a registered
investment adviser whose principal office is located in Oklahoma. Womack
Investment Advisers, Inc. is also registered in the State of California, the
State of Illinois, the State of Indiana, and the State of Texas. WIA only
transacts business in states where it is properly registered, or excluded, or
exempted from registration requirements.
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