Since mid to late-2019 when interest rates really started to fall, the dividend yield on the S&P 500 consistently provided a higher yield than the two-year US Treasury. With a higher payout plus the potential for price appreciation, equities looked more attractive to many investors. The period from the Financial Crisis through 2017 also saw a similar setup where the S&P 500’s dividend yield was higher than the yield on the 2-year, but before the Financial Crisis and the FOMC’s zero-interest-rate policy, it was extremely uncommon for the S&P 500 to yield more than the two-year Treasury. This year has caused a tidal shift in the balance of power in yield between the S&P 500 and the two-year Treasury. As the Fed came to the conclusion that inflation wasn’t as transitory as originally thought and found itself behind the inflation curve, it shifted from a much more accommodative stance to one that was more biased towards tightening, and that shift resulted in one of the most rapid increases in two-year Treasury yields in decades. In the process of this spike in rates, back in February, the yield on the two-year rose back above the dividend yield of the S&P 500 for the first time since 2019.
As Treasury yields have continued to spike, the premium in yield of two-year Treasuries relative to the dividend yield of the S&P 500 reached an important milestone last Friday (4/8). As shown in the chart below, the spread between their yields widened out to 110 basis points (bps), taking out the high of 108 bps from 2018. At these levels, the spread between the two is now the widest it has been in fourteen years since the Financial Crisis. It started with long-term Treasury yields, but as the overall trend in rates has been higher, most of the Treasury yield curve is now yielding more than the S&P 500. For years now, investors have had a TINA (There Is No Alternative) relationship with the stock market, but as interest rates have shot higher, TINA is taking a backseat to BABY (Bonds Are Better Yielders). Click here to try out Bespoke’s premium research service.