Yield Convergence

Real yields (as measured by the US Treasury 10-year TIPS) finished March 23, 2021 at -0.66%. No kidding, the real yield, which is the nominal yield we’re all accustomed to quoting, less the inflation rate, is actually negative.

Goldman Sachs, among others, predicts that such low rates will be helpful to US equity prices, as indicated by recent equity fund inflows.

Look at the graph for a comparison of 1999, where the 10-year US Treasury bond yield exceeded 6% and the S&P 500 index dividend yield was ~ 1% (for a yield spread of 5%), vs. today, where the 10-year yield is roughly equivalent to the S&P dividend yield (for a spread less than 1%). Why would an investor take today’s interest rate risk for a paltry expected yield?

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