Today the 3-year Treasury note was auctioned for 4.2% annual yield. That's not a bad rate of return for a risk-free investment (assuming held to maturity). At least it's not completely laughable -- I mean, it wasn't that long ago that short-term bonds paid 1% or less. If rates continue to rise, at what point to investors seriously begin to shed stocks and buy Treasuries? 5%? 6%? 8%? never?
The question should perhaps rather be, have we for now returned to the common inverse function bond yields had on stock prices of yesteryears/all times, adhering to the normal focus on the importance of low yields stimuli on the economy - ending the era of neutral influence or the "investors shying stocks in preference of fixed income / flight back to stocks" we've witnessed until very recentty . I remember a comprehensive much talked about Wharton study from the mid-nineties, that found that the single most decisive factor for bull-runs was rising bond-prices / falling yields. Funny how though, we as traders sometime just transparently adjust to new times, where suddently the main focus is on unemplyement numbers amid the fed's prevalent policy at a given time. Just as forex is something people at times focus incesstantly on for stock-market direction when in times of extreme levels held together with deficits/surplusses on the trade and/or currency balance this has a major impact on central banks policies - and other times it means nill. Perhaps just as well, that one often see the people working the floors or desks just know what releases now is in vogue for impact on the market, without apparenlty understanding anything really about the underlying interpretations as to why this is. In Denmark we had a long time standing major political figure who was the minister of finance, who always refed to the people at the exchanges as "a bunch of hysteric bitches". Not that he had too much of a grasp of the inner-workings of the markets and their functions either, in spite of generally being recognized as having a big talent for macro-economics. well... adam Today the 3-year Treasury note was auctioned for 4.2% annual yield. That's not a bad rate of return for a risk-free investment (assuming held to maturity). At least it's not completely laughable -- I mean, it wasn't that long ago that short-term bonds paid 1% or less. If rates continue to rise, at what point to investors seriously begin to shed stocks and buy Treasuries? 5%? 6%? 8%? never? [/QUOTE]
You mean the Fed Model. Currently the S&P 500 at 1,231 has a PE ratio of 20.4. This implies a 30yr T-bill of 4.9%. The actual 30yr T-bill yield is 4.57%. If you think 30yr rates are going to 6% in 2006, that would imply a PE ratio of 16.7 under the Fed model, or a target of 1,000 on the S&P 500. That would be an 18% pullback from here. I really wasn't thinking of the Fed model in my question. With Baby Boomers nearing retirement I'm thinking there's going to be a magic point where Boomers say screw it, sell the equities and buy a bond ladder.
I am getting 3.5% on a savings account at emmigrant direct.. and %4-4.5 on 2-3 year cd's. I think in the next 6-12 months.. the smart money will follow me.
I think it all depends on inflation, if inflation is running at 3% and you can get 5 or 6% from a 3 year bond my bet is a lot of older people will take that and exit equities.