Stocks Are Losing the Race With Bonds in Era of Tightening Fed

Bonds have been whispering in the ears of stock investors all year. Now they’re starting to shout.

Soaring inflation and tightening monetary policy boosted rates on 10-year Treasuries to 3.5% last week, the highest since 2011. While comparing bonds with ever-volatile stocks is tricky, various measures show the allure of fixed income growing. Stocks generate about 5.3% of their price in earnings, on average, making the gap between the two asset classes’ “yield” close to the slimmest since 2018.

Applying the same exercise to blue-chip corporate bonds, shows that investment-grade yields were just 45 basis points below that of the S&P 500’s payout through Tuesday, the smallest gap since 2010.

Rising rates across the fixed-income landscape are chipping away at the “there is no alternative” mantra for stocks. For the bulk of the past decade, the narrative has been that low rates globally have pushed yield-hungry investors out on the risk spectrum into assets such as equities. However, with the Federal Reserve hell-bent on taming inflation, even if it means taking growth down with it and tipping the economy into a recession, bonds are beckoning once again.

“For income investors, for our multi-asset class income strategy, we’re leaning more into the bond market than we have over the last decade,” James Camp, Eagle Asset Management Inc. managing director of strategic income, said in a Bloomberg Television interview. “You add on a corporate credit spread that’s widened, you’re getting 4.5, 5% yield for an asset class that’s been out of favor for a long time. So it’s time to take a good hard look at that.”