Gloomy US Yields, Silver Lining for US Stocks (2 min read)
Yields have tumbled from their November 2018 peak of around 3.25% to a paltry 2.3% in recent weeks. The bulk of the drop is due to falling real yields, which suggests the market is struggling to see a robust growth path for the US in the years ahead. The much hoped for productivity boom, like the one seen in the 1990s and which was associated with high real yields, is fading fast.
This current multi-year phase of low real yields is an outlier in modern US history, especially outside of inflation spikes (see first chart). The implication is that we need to compare the US to other low real yield countries like Japan or Europe, rather than its own history to get a proper sense of what is to come.
The silver lining is that nominal US yields are almost 3% below US nominal growth (see second chart). At the simplest level, this means one can borrow low and invest in markets that track nominal growth to capture that net 3%. Typically, US stocks follow this spread, and currently they look a bit low compared to where they should be. This augurs well for risk – at least, once we get past the political noise around trade wars.