U.S. Treasury Bond Yields Pass S&P 500 Dividend Estimate as Inflation Pressures Weigh

A key benchmark that gauges stock performance flips in favor of bonds as 10-year Treasury note yields edge past the estimated S&P 500 dividend yield.
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U.S. Treasury bond yields leaped past the dividend yield for the S&P 500 Thursday as bond markets continue to sell-off amid inflation concerns and a broadening domestic recovery. 

Benchmark 10-year notes traded as high as 1.6% in mid-afternoon dealing, the highest in more than a year, before easing to around 1.53% and just ahead of the estimated S&P 500 dividend yield of around 1.48%.  A much weaker-than-expected auction of seven year bonds, which drew a record low demand ration of 2.04 and a yield to maturity of 1.195%, added to the broader bond market pressure. 

Efforts by Federal Reserve Chairman Jerome Powell to tame inflation concerns and reassure markets that rates and bond purchases aren't likely to change any time soon seem to have had little effect.

Ten year note yields have risen more than 60 basis points so far this year as investors price-in faster inflation linked to the economic recovery, steeper borrowing commitments on the back of President Joe Biden's $1.9 trillion stimulus bill and questions over the fate of the Fed's quantitative easing program, which is taking around $120 billion in bonds from the market each month.

With around 85% of the S&P 500 reporting profits for the December quarter, earnings are expected to rise 3.7% from the same period in 2019 and then rebound to a 21.7% growth rate over the three months ending in March.

That said, stocks are trading at notably high valuations, with the collective S&P 500 P/E ratio sitting at 22.2, well ahead of the five-year average of 15.3, and the overtaking of the divided yield could trigger concerns for near-term stock performance. 

U.S. stocks extended declines on the Thursday move, with the S&P 500 falling 53 points, or around 1.3%, to 3,871.75 points. The Dow Jones Industrial Average also slumped lower, falling some 300 points from last night's record high close to 31,660 points.

Inflation is considered the so-called "enemy of bonds" because it erodes the value of future payments. And its effect is even more pronounced on longer-term bonds, which the Treasury is likely to rely on in the coming years as part of its borrowing plans.

In fact, the new spending commitments, alongside legacy costs linked to tax cuts, will mean the Treasury will likely issue a record net of $1.84 trillion in new bonds this year, according to JPMorgan Chase, a figure that's more than four times last year's total.

With around 80% of the S&P 500 reporting profits for the December quarter, earnings are expected to rise 3.7% from the same period in 2019 and then rebound to a 21.7% growth rate over the three months ending in March. 

That said, stocks are trading at notably high valuations, with the collective S&P 500 P/E ratio sitting at 22.2, well ahead of the five-year average of 15.3, and the overtaking of the divided yield could trigger concerns for near-term stock performance.