How to Invest When Everything Yields the Same
One option is to look outside the U.S., where some are betting on another ‘great convergence’ among investment assets
By James Mackintosh, The Wall Street Journal, June 8, 2025
Here’s an investment puzzle: Treasurys, stocks, cash and corporate bonds all yield about the same. Either risky assets are less rewarding than usual or safe assets are less safe than usual. Or, perhaps, both.
The gap between the highest and lowest yields among the main U.S. assets is the smallest in 40 years, having dropped after the election in November and stayed low. This uses the earnings yield for stocks, the earnings divided by price, or the inverse of the PE ratio, along with the yields on the three-month Treasury bill, as a proxy for cash, the 10-year and 30-year Treasurys and the ICE BofA U.S. corporate bond index…
Do you want to buy the best, when it is becoming somewhat less good, or the weaker places, when they are becoming somewhat less bad? Is this a new era of convergence, or will the post-2008 norm of the U.S. outperforming everywhere else resume? My guess is there is more to come from Europe and Japan, but despite all the risks, I like the ballast Treasurys provide.
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The rest of the article is discussion and speculation. But the charts tell the story. It has been 25 years since Treasurys, stocks, cash and corporate bonds all yielded about the same.
And what a long, strange trip it’s been, right? It’s been 25 years since the Federal Reserve suppressed interest rates, creating long periods when the real yield of the 10 year Treasury was 1% or less and pumping up stocks and real estate prices.
Stocks are in a historic bubble. The Current S&P 500 Earnings Yield is only 3.49% while the 10 year Treasury yield is 4.51%. The yield has been increasing steadily since the beginning of 2025. The real yield of the 10 year Treasury is 1.66% so it is lower than pre-2000 real yields and certainly not too high. With the downgrading of Treasury debt, fears of unsustainable and growing federal deficits and withdrawal of purchasing by China there is a real potential for Treasury yields to continue to rise.
The 10 year TIPS yield is 2.1%. The 10-year inflation expectation is 2.3% which has been stable since 2022. The government policies of high tariffs and rejection of immigrant labor can be expected to increase inflation but this hasn’t been taken into account by the bond market. Secondary-market TIPS maturing in 2043 yield 2.5%. This is a high point (since 2009).
The Treasury yield curve has a positive slope and is moving upward.
The Fear & Greed Index is in Greed. Stock indexes are increasing. The Cyclically Adjusted P/E Ratio (CAPE Ratio) is 36.9 compared with a historic median of 16.
The trade has been neutral (neither risk-on nor risk-off) for the past few weeks.
Gold and copper prices have stabilized though silver is popping. The USD is continuing its decline which began at the start of 2025.
Economic activity in the manufacturing sector contracted in May for the third consecutive month, following a two-month expansion preceded by 26 straight months of contraction, say the nation’s supply executives in the latest Manufacturing ISM® *Report On Business®.
Economic activity in the services sector contracted in May, the first time since June 2024, say the nation’s purchasing and supply executives in the latest Services ISM® Report On Business ®. The Services PMI® indicated slight contraction at 49.9 percent, below the 50-percent breakeven point for only the fourth time in 60 months since recovery from the coronavirus pandemic-induced recession began in June 2020.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2025 was 3.8 percent on June 5. This is very strong growth. The Federal Reserve will not cut the fed funds rate since the economy is strong and the unemployment rate is unchanged at 4.2%.
The Cleveland Fed’s Inflation Nowcast shows inflation slowing but the core CPI and PCE are still above the Fed’s target of 2%.
The markets are relatively calm. There will be more volatility when Congress finally passes the budget and when the results of the tariffs begin to bite in a few months.
The METAR for next week is sunny.
Wendy
https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/may/
