Bonds Becoming as Attractive to Own as Stocks

The attraction of owning stocks over less risky investments is at its lowest level in decades, despite the equity market’s upward climb this year.

This year, the benchmark S&P 500 index gained a hefty 16%, buoyed largely by Wall Street's enthusiasm for artificial intelligence. AI fever has skyrocketed the value of major tech stocks to unprecedented levels.

At the same time, hot economic data has helped push Treasury yields higher in recent months. Bonds have become coveted additions to investors’ portfolios thanks to the Federal Reserve’s historic pace of interest rate hikes it began last March to tame runaway inflation.

Rising yields can be a double-edged sword, posing a challenge for stocks. Higher bond yields typically mean companies must pay more to cover their debt, potentially denting their profits.

This uptick in bond yields has also shrunk the expected benefits of owning stocks over safer bets, pushing the equity risk premium to its lowest in twenty years.

Treasury bonds have traditionally been considered more secure than stocks, given they're backed by the U.S. government. Moreover, these bonds guarantee consistent returns for investors.

Many analysts recommend that investors weigh increasing their positions in high-quality bonds, considering that the economic outlook remains foggy.

Yields have remained elevated as investors debated whether the Federal Reserve could keep interest rates higher for longer as surging oil prices and robust economic data signal that the central bank has more room to tighten monetary policy.

Stocks cooled off somewhat in August, a historically tough month for markets since there’s a lack of economic data to spur a rally.