r/bonds

Why the heck is this happening???

For a risk averse person, last 2 decades have been painful to see artificially low interest rates. It was obvious the party wont last forever but it did for a long long time and in this process it inflated all asset classes. I feel the most exposed are recent retirees exposed to long-dated fixed income portfolios and younger folks who entered the real estate market in the last few years.

As yields go up across the world, i wonder, where will they likely settle before the big bailouts happen again? Is is 6% for US 30 year tsy?

The capital and finance hungry $1tn annual AI build looks super scary as it is crowding out capital for other asset classes.

Furthermore, the macro backdrop looks increasingly fragile with rampant inflation and energy price shocks that are impacting the emerging world particularly adversely.

How would these yields reprice different asset classes, like real estate, infrastructure style low risk equities, etc.

As a student of financial markets and history, i an interested in understanding what happens when real bond yields exceed the earning yields on equities. We have arrived at that inflection point for the fourth time in a 100 years.

Since 1900, real (after-inflation) bond yields have rarely paid more than stocks' earnings yield (1 ÷ CAPE). It’s happened on 3 occasion before:

1. 1929;
2. 1936–37; and
3. 1999–2000

In all 3 cases, what followed was a big bear market for equities.

I wonder if this time will be different with the unprecedented AI boom. Is it going to be different than the internet or the railroads? Is this the tulip mania?

10-year TIPS are paying about 2.9% after inflation vs. stocks' earnings yield of 2.4% with a CAPE ratioof 41.

This does not paint a pretty reading for holding equities.

Full disclaimer - i have moved capital towards short-duration low risk instruments and selective positioning in gold. I am not holding any long-term bonds - concerned about the rising yields which have further room to run. From an equity perspective, i feel we are in one of the frothiest markets with CAPE ratio of 41. I dont have a view on when the music stops but beleive that we are yet another step closer to an equity bear market. It may still take another year or more and play out differently. Conservatism has been quite costly for folks calling a top in equity markets. No one really knows.

I thing i know is that whenever CAPE ratio has exceeded 40x, real returns over the following 10 year period have been negative for equity holders.

As a prudent long-term investor (wannabe), I rather sit and watch from the sidelines and take positions when i am comfortable with the risk-reward proposition.

Would welcome insights and perspectives from folks you might have a deeper understanding or alternate data.