An index of the bonds of the biggest, most creditworthy U.S. companies hit a yield of 5.3% this past week, its highest level in about a year, according to data from ICE BofA. With the 10-year inflation break-even rate at around 2.4%, that implies that high-grade corporate bonds could deliver real, inflation-adjusted returns approaching 3% over the next decade.
That is tempting indeed. But another way of looking at that yield is how much an investor is being compensated for the additional risk of corporate credit over U.S. Treasurys.
And, right now, investors are getting about as little for that extra risk as they have in a generation. That yield gap—or spread—has narrowed as Treasury yields have surged. It is hovering near its lowest level since the 1990s, according to the ICE BofA index… [end quote]
Bonds don’t look tempting. What about stocks?
Historically, investors were rewarded for the added risk of stocks with a higher earnings yield than bonds. But not anymore, while many stocks pay paltry dividends and prices are in a bubble.
There’s just too much money (much of it borrowed) chasing investments.
The problem (for me personally) is that stocks have appeared to me to be overpriced for the better part of 30 years. And yet the money I have mindlessly dumped into stocks over that time period has more than quadrupled in price while my heavy cash allocation has consistently underperformed for the better part of 30 years.
For me, lbym was, is, and always will be my primary defense against a world economy that appears to me to be built on a massive wall of debt everywhere - government and household - over which I have no control.
Paid for home.
Money I don’t need in stocks.
More money than I need in cash and bonds - mostly govt inflation adjusted.
The only new thing of note for me is the money I put into international equities - mostly wip, and some Europe (vgk) as a hedge against a declining dollar a little over a year ago. That was arguably a gamble given that the dollar has generally outperformed the rest of the world’s currencies over the last fifty years, but I am still riding it. Maybe 25% of my money is in international ETFs versus a 5-10% allocation in the past.
Basically, even if stocks and bonds are built on a wall of debt, I don’t know what more I can do about it.
