While US stock markets have been more or less stagnant for several days, bond markets have seen strong moves: yields on longer-dated government bonds have risen sharply – bond prices have declined – quite sharply. For example, the 10-year US bond, which is a guideline for mortgage rates and bank lending rates, hit the “magic mark” of 2.50% yesterday. Yields on longer dated bonds rose more sharply than those on shorter dated bonds, sharpening the US yield curve again.
However, this development should also be interesting for the US stock markets! Because after a very long time, it´s again the case that a US government bond with a two-year maturity offers a higher yield than the average dividend yield in the S&P 500! The 2-year US bond currently yields 1.86%, while the average dividend yield in the S&P 500 is only 1.80%! Significantly above, as mentioned before, is the yield on the 10-year US bond, currently at 2.49%.
This means that those who are faced with the alternative of either buying bonds or stocks could become thought-provoking. Because in the certainly unrealistic case that both the stock prices in the S&P 500 and the price of the 2-year US bond would not change, investing in the 2-year bond would be more lucrative! This applies all the more for the longer terms (5 years, 10 years and 30 years).
Thus, US government bonds have become a real competitor for the stock markets. Now it can be argued that the US companies will increase their dividends due to the liquidity blessing of the US tax reform – but that remains to be seen. Either way, the US stock markets are anything but cheap! Rather, they’re close to a top, says the “british Warren Buffett” Mike Mellon:
„We are pretty close to a top. I have been in this market for 30, 40 years and I would say it is extremely fully-valued by most measures“.
Above all, he sees the big tech stocks as being completely overvalued, because next year’s new regulations would clearly push margins, especially for FANG values. But yields on bonds would continue to rise, making the situation on the financial markets increasingly uncomfortable: