'Real' Bond Yields Are Dipping. Buy Tech and Communications Stocks.

The recent decline in so-called real bond yields looks likely to continue. That makes technology and communications stocks look like solid bets.

Subtracting the latter from the former leaves a real yield of about 2.27%, which is down from about 2.5% in early October. A look at history also bolsters the case for a lower real yield. The 10-year real yield has spent most of the time since the 2008-2009 financial crisis below 2%. That is because bond investors are usually happy to accept only a slim return over and above expected inflation, as long as they are confident that inflation won’t spike higher.

Lower real yields on long-term government debt make that safer investment less attractive, giving people more reason to buy tech shares, which are priced based on particularly long-term forecasts for cash flows. Valuations of tech stocks rise as a result.

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