Interest rates are to asset prices, sort of like gravity is to the apple. —Warren Buffett
Interest rates are to asset prices, sort of like gravity is to the apple.
The great bond bull market began in the early 1980s as inflation and nominal interest rates retreated from historically high levels. That decline in interest rates ran for decades and ultimately produced one of the post-GFC era’s most unusual features: more than $18 trillion of negative-yielding government debt at the pandemic peak. The post-Global Financial Crisis (GFC) period intensified that decline through banking-system repair, subdued credit creation, low policy rates, quantitative easing, muted inflation and demand for high-quality sovereign debt.
That backdrop helped shape the “there is no alternative” or TINA era. Low Treasury yields reduced the opportunity cost of equities and pushed investors farther out the risk curve. The spread between the U.S. 30-year Treasury yield and the S&P 500 dividend yield captures that compression. From 2009 through 2019, the spread averaged only 1.18 percentage points. During 2020 and 2021, it compressed to an average of 0.17 percentage points.
The same comparison today points to a different regime. The 30-year Treasury yield stands near 4.93%, while the S&P 500 dividend yield is near 1.08%, leaving a spread of roughly 3.85 percentage points. That puts the current spread in the 99th percentile since 2009 but only the 69th percentile since 1990. The spread is highly unusual for investors conditioned by the post-GFC and pandemic periods, while still within the broader post-1990 range. During the 1990s, the spread averaged 4.57 percentage points, and from 2000 through 2007 it averaged 3.45 percentage points. The abnormal period was the post-GFC through pandemic era of abundant liquidity, suppressed term premiums and negative-yielding bonds.
Capital demand has increased relative to available funding. Artificial intelligence data-center buildouts, defense spending, infrastructure and energy security all require capital. Fiscal deficits remain large, and public and private borrowers are competing for capital. Policy rates are higher, and central-bank balance sheets are no longer expanding as they did during QE. Tighter liquidity and rising demand put upward pressure on the price of capital.
The S&P 500 dividend yield is essentially as low as it has been in the post-1990 era. The current yield of 1.08% sits in the 0.3rd percentile since 1990, versus a historical average of 1.99%. The lowest reading since 1990 was 1.05% on July 17, 2000, near the peak of the dot-com era. The 30-year Treasury yield is less unusual by the same standard, sitting in the 59th percentile since 1990. The dividend yield is the more unusual side of the comparison.
Long Treasuries again offer meaningful current income, while the S&P 500 dividend stream is just over 1%. Equities still offer earnings growth, buybacks and capital appreciation, so that cash-flow advantage does not resolve the broader allocation debate. It does, however, mark a clear break from the TINA era and raise the hurdle rate for risk assets.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
