3 reasons why Wall Street giants say investors should pay attention to Treasurys as yields soar

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

• The 10-year Treasury yield topped 5% for the first time since 2007 this week.

• There are three reasons why it could be a good time to plow cash 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 one of the worst market crashes of all time, according to Bank of America.

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

Here are three reasons why now could be a good time for investors to jump into the Treasury bond market, according to some of Wall Street’s top investing experts.

1. Treasury yields are now in line with the highest dividends paid by S&P 500 firms

The yield on the 10-year Treasury is about the same as the biggest dividends paid by S&P 500 firms, according to Goldman Sachs strategists.

The difference between the dividend yield of the top 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 more than doubled that of the broader market so far this year, according to Goldman Sachs data.

2. Bond yields probably aren’t falling soon

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

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

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“Bond yields are likely to revert to the low levels of recent history, and we expect they will remain higher for longer. Remember that higher rates mean better long-term bond returns,”  Vanguard said in a recent note.

“That doesn’t mean 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 isn’t as optimistic with interest rates 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 better in 2023, they’ve sold off recently amid the chaos in the bond market, which could rear its head again depending on what the Fed does in response to economic conditions.

“We think the current macro backdrop isn’t friendly for broad equity exposures. Higher rates and stagnant growth have weighed on markets, but the move lower in stocks shows they are adjusting to the new macro regime,” BlackRock strategists said this week.

Meanwhile, dividend growth among S&P 500 firms is likely to shrink over the next year, Goldman Sachs strategists forecasted. That’s partly due to a sluggish 1% growth in corporate earnings expected this year, as well as the lack of “dividend paying capacity” in the real estate and financial sectors.

“Our economists expect that the Fed will not deliver the first cut to the Fed Funds rate until the end of 2024. We believe that investors should wait until policy rate cuts are more clearly in view to begin 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 close to previous market crashes, some veteran experts warn, all while the risk of a recession still looms over the US economy.

Read the original article on Business Insider