bond yields still low 'on value model'
A very old (est 1934) and independent EQUITY research shop out with a note this morning spotlighting how yields are still low,
Bond Yields Still Low on Value Model
Our proprietary Treasury Bond Yield Model is signaling that bond yields are still too low (despite the recent move higher) based on the investment fundamentals. Our model takes into account factors such as current yields, GDP growth, long-term inflation, stock prices, and earnings, in order to make an asset-allocation recommendation between stocks and bonds. We smooth trends out over a five-year period to avoid short-term momentum swings. Our current 10-year T-bond fair value yield is 4.0%. The normal valuation range has a floor of 2.8% and a ceiling of 5.3%. The current 10-year bond yield is around 1.75%, below the low end of the fundamental range and about 55% below fair value. Why is this the case, especially given recent GDP growth and inflation trends (not to mention aggressive fiscal stimulus spending from Washington during the pandemic)? In our view, low U.S. yields more likely reflect technical factors such as heavy buying from overseas investors seeking safety (or at least, yields that are not below zero), rather than the economic fundamentals. From an asset-allocation standpoint, we think bonds remain fully valued compared to stocks and recommend that long-term investors modestly favor equities in their diversified portfolios.
Most models I know of aren’t perfect and so it goes … On paper, their words make a fair amount of common sense but as we saw — moments yest — nothing without consequence and I cannot imagine 10yy at 4% and what housing / auto / consumer credit financing might look like. I do NOT envy the Fed but will be listening to see what, if any nuances are introduced tomorrow afternoon.