• Bonds are looking more attractive than stocks for the first time in years.

• The ten-year Treasury yield topped 5% for the first time since 2007 this week.

• There are three reason it could possibly be a excellent time to plow money into ultra-safe Treasurys.

For the first time in years, bonds are looking attractive relative to stocks as yields soar on ultra-low-risk US government debt.

The yield on the 10-year Treasury topped 5% for the first time since 2007 this week, and the plunge in bond prices represents considered one in every of the worst market crashes of all time, based on Bank of America.

But experts say that yields at 5% should look attractive to investors with money on the sidelines, especially when considering the long-standing status of Treasurys as an extremely low-risk investment.

Listed listed below are three reason now could possibly be a excellent time for investors to leap into the Treasury bond market, based on a couple of of Wall Street’s top investing experts.

1. Treasury yields in the meanwhile are in step with the most effective dividends paid by S&P 500 firms

The yield on the 10-year Treasury is with regard to similar to crucial dividends paid by S&P 500 firms, based on Goldman Sachs strategists.

The difference between the dividend yield of the very best 20% of S&P 500 dividend payers and the yield on the 10-year US Treasury has narrowed from one percentage point in May to to zero this week, strategists said in a note on Friday.

As that spread has narrowed, investors have been pulling money from dividend stock funds in 2023. Outflows from US equity dividend funds have greater than doubled that of the broader market so far this 12 months, based on Goldman Sachs data.

2. Bond yields probably aren’t falling soon

Treasury yields are likely staying elevated, on account of the Fed’s committement to keeping a lid on inflation. Central bankers have raised rates 525 basis-points over the past 12 months to lower high prices, which has helped pushed Treasury yields higher.

BlackRock said in a note this week that it was obese short-term Treasury bonds. Strategists at Vanguard, meanwhile, pointed to long-term US Treasuries as a competitive investment option, as they enable investors to lock in guaranteed yields, which is in a position to remain higher as rates of interest stay elevated.

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“Bond yields usually tend to revert to the low levels of recent history, and we expect they’ll remain higher for longer. Bear in mind that higher rates mean higher long-term bond returns,”  Vanguard said in a recent note.

“That doesn’t suggest bonds will necessarily deliver outsized returns over the next three months, as there’s still considerable uncertainty. What it does mean is that, with real yields at their highest levels in 15 years, bonds today can offer more significant value in total returns to a portfolio,” strategists later added.

3. The outlook for stocks is uncertain

The outlook for stocks is just not as optimistic with rates of interest staying higher for longer. Higher borrowing costs weighed stocks down heavily in 2022, causing the S&P 500 to notch its worst performance since 2008. While stocks have performed higher in 2023, they’ve sold off recently amid the chaos inside the bond market, which could rear its head again depending on what the Fed does in response to economic conditions.

“We expect the current macro backdrop is just not friendly for broad equity exposures. Higher rates and stagnant growth have weighed on markets, nevertheless the move lower in stocks shows they’re adjusting to the brand recent macro regime,” BlackRock strategists said this week.

Meanwhile, dividend growth amongst S&P 500 firms is more prone to shrink over the next 12 months, Goldman Sachs strategists forecasted. That’s partly on account of a sluggish 1% growth in corporate earnings expected this 12 months, along with the dearth of “dividend paying capability” within the true estate and financial sectors.

“Our economists expect that the Fed won’t deliver the first cut to the Fed Funds rate until the tip of 2024. We imagine that investors should wait until policy rate cuts are more clearly in view to start out buying dividend payers,” the bank said.

Other market forecasters have warned of more trouble ahead in equities, especially as higher bond yields draw investors away from the stock market. Stocks are following patterns eerily near previous market crashes, some veteran experts warn, all while the prospect of a recession still looms over the US economy.

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