At What Rate?

The 10-year US Treasury bond trades at basically 3/4s of 1% {.75}.  A 30-year US bond yields slightly over 1.5% right now.  Such low yields are one of the reasons that stocks can trade at valuation levels that would normally be worrisome.  At what level do interest rates become a problem for the stock market and the economy?  I don't know and obviously right now that seems like a problem off well into the future.  But think about it for a second.  We have borrowed trillions to fight the virus and will ultimately end up borrowing trillions more.  At what point do the public debts of the US start to concern the investment community.  My guess is you have to see the 10-year well over 2% and the long bond nearing 4% for bonds to start becoming serious competition for stocks.  That's probably not going to happen anytime soon.

When you buy bonds at such low yields you are saying that you are willing to park your money in an investment that will likely not even keep up with inflation over the life of the bond just to get your principal back.  Contrast that with a simple S&P 500 ETF.  These currently have dividend yields slightly under 2% with a chance to also see those dividends grow over time.  You also get the potential for growth when the economy improves that has historically been in the 4-6% range.  If I had that choice then to me the obvious longer term choice is the ETF.  You do, however, have to be able to live with the market's volatility.  If you've done a proper asset allocation and have a solid understanding of your own personal risk/reward scenario this volatility is easier to live with.

Back Thursday.

*Long ETFs related to the S&P 500 in client and personal accounts.