Bond Yields for ‘New Era’ Lure Dividend Investors From Stocks

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The prospect that global interest rates may remain higher for longer is tilting the case for some investors to own more bonds over stocks.

Fixed income offers a 180-basis-point yield premium over the dividend returns from stocks, according to data compiled by Bloomberg. That’s the widest in 15 years, and the gap is likely to persist or even widen as traders bet that the era of low rates has come to an end.

Global bonds are offering an average yield of 4.0%, data compiled by Bloomberg show, almost twice as much as the 2.2% dividend return for the MSCI ACWI Index. Fidelity International points out that positive real yields make the case for Treasuries even more compelling. The prospect that borrowing costs may rise further — with Fed minutes published on Aug. 16 showing rate setters remain largely concerned about inflation — has pummeled equities in recent weeks. MSCI’s gauge of developed and emerging market stocks has fallen over 5% so far this month.

This came on the heels of a move by the Bank of Japan in July to loosen its grip on bond yields — a decision that’s expected to boost the yen over time and make domestic assets more attractive. The positive sentiment pushed the yield spread between the bonds and stocks to near the narrowest in more than two years.

 

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