The Chart That Should Scare Every Bond Investor

October 8th, 2012 by

Bonds look very, very, expensive compared to stocks when focusing on their ability to generate income. Large Cap Stocks (the S&P 500) are  now paying a higher dividend yield than the 10-year treasury. This is very unusual. Since 1990, the treasury note / S&P 500 Dividend yield ratio has averaged 2.4. As stocks have a track record of dividend growth and a treasury bond has a fixed coupon payment, it makes sense that stocks should generate less income than bonds at any one specific point in time. However, something right now is not right!

The yield on the S&P 500 is not exceptionally high or low compared to its historical average, suggesting that the stock market is more or less functioning normally.  However, the 10 year Treasury is trading about ⅓ of its historical average.

Average Yield On 10 Year Treasury Bond Yield (1990-2012)

5.06%

Yield On 10 Year Treasury Bond Yield September 18th, 2012

1.82%

Average Yield On The First Business Day In January and Sept includes September 18th 2012 as a datapoint.

Average Dividend Yield On S&P 500  (1990-2012)

2.11%

Dividend Yield On S&P 500 On September 18th, 2012

1.94%

Average Yield On The First Business Day In January and Sept includes September 16th 2012 as a datapoint.

Historical Ratio of 10 Year Treasury Yield To S&P 500 Dividend Yield

2.4
Current 10 Year Treasury Yield To S&P 500 Dividend Yield

0.9

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