Salient to Investors:
10-year Treasuries yield 2.61 percent versus the S&P 500 aggregate earnings yield of 6.4 percent – more than double the average spread of 1.9 points since 2000.
Investors are avoiding longer-term Treasuries, concerned that returns will be depressed for years, and money managers foresee the end of a rally that began in the early 1980s.
Howard Ward at Gamco Investors said the lost decade for bonds has begun, and stocks are likely going to be the asset class of choice over the next 10 years. Ward said the tide has turned and the economy is doing better, so bond investors will have a hard time making any money.
Lipper said investors withdrew $9.1 billion from fixed-income mutual funds and ETFs last week , the second-highest total in more than 20 years.
JPMorgan Chase, Barclays, Bank of America, Morgan Stanley and Goldman Sachs all recommend stocks over most bonds as equity returns outpace company debt by the most since at least 1997.
Jim O’Neill ex-Goldman Sachs said the global economy is in the early stages of the recovery of the equity culture and perhaps the end of a 30-year growing love affair with bonds. O’Neill said when game starts to change with central banks, it is inevitable bonds will suffer.
Mohamed A. El-Erian at Pimco said liquidity is king and what we are getting is cascading liquidity failures – when you change the liquidity paradigm, you get massive technical unwinds and volatility.
Average analyst estimates predict profits for S&P 500 companies will rise more than 10 percent in each of the next two years after almost doubling since 2008. That would translate to yields of 8.3 percent assuming no change in the stock index. The S&P 500 is at a14.7 times 2013 profit forecast.
Leon Cooperman at Omega Advisors said the stock market multiple is low relative to interest rates and there is room for rises – fair price for the S&P 500 is 1,600 to 1,700.
Jeffrey Gundlach at DoubleLine Total Return Bond Fund said you will lose less in Treasuries for the next few months if rates rise than many other asset classes. Gundlach said government bonds are also caught up in price deflation of assets and commodities, but if bond yields rise further then equities and commodities will clearly tank.
Bill Gross, at Pimco said sellers of Treasuries in anticipation that the Fed will ease out of the market might be disappointed unless we have inflation close to 2 percent. Gross recommends buying Treasuries while the Fed continues to purchase debt, even given the 30-year bull market for bonds is over. Gross said real growth to lower unemployment below 7 percent is a long shot over the next 6 to 12 to 18 months.
Laszlo Birinyi said the S&P 500 could climb to 1,700 as we still haven’t seen the real rush to equities – the market has a long ways to go.
The Fed says equity investors may reap unusually high returns during the next 5 years because stocks are inexpensive as measured by the Fed Model, which compares earnings yield for equities with government bond yields. The spread was a record high of 6.6 percent in March 2009 and then fell to 0.3 percent in December 2009.
Rick Rieder at BlackRock said with 10-yr yields rising, equities represent better value than Treasuries, particularly on the longer end of the curve – we have seen the lows on interest rates. Rieder recommends government debt due in less than 5 years, estimating that 10-yr Treasury yields will move closer to 3 percent in 2014.
David Rosenberg at Gluskin Sheff says the only way bond yields will come down and revisit those lows is if the economy relapses, and the odds of that happening at least in the next year have dropped significantly – the economy has managed to crawl through. Rosenberg is shorting government debt and buying high-quality corporate and speculative-grade securities, and bank stocks and insurer stocks. Rosenberg said the stock market would not be where it is without the bond market where it is, and the Fed is using the bond market as a tool to generate a higher stock market and it’s certainly working – the secular bull market is over.
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