The return offered by short-term US government debt has climbed to equal the US stock market’s dividend yield for the first time since 2008 — an important post-crisis inflection point for markets.
US Treasury bills are ultra-safe, cash-like instruments that lubricate much of the global financial system, and yields have been climbing as the Federal Reserve has been raising rates and the US government has had to finance its widening budget deficit.
That has lifted the yield of three-month Treasury bills to a 10-year high of 1.8995 per cent on Friday, according to Bloomberg data. At the same time, the trailing dividend yield of the S&P 500 stock market index (.SPX) has dipped slightly from the roughly 2 per cent mark it has traded around in recent years, to 1.8959 per cent.
The paltry post-crisis returns offered by cash have been a crucial pillar underpinning demand for bonds and equities, with traders dubbing the driver “Tina”, or There Is No Alternative. But for the first time since 2008 investors now have an alternative.
Indeed, JPMorgan Chase’s John Normand said the returns on cash had so far this year beaten both bonds and equities — a classic late-cycle harbinger — despite global economic growth remaining robust.
“What has been surprising this year has been the degree to which cross-asset performance has behaved as if the late cycle had already arrived, despite little material change in the growth outlook,” Mr Normand wrote in a note to clients, who he said should stick with equities.
Treasury bill yields have been lifted by the Fed’s interest rate increases, and next month’s widely expected second hike this year, but the US government’s decision to skew more of its engorged debt issuance towards shorter-term debt maturities has also played a role.
However, other analysts are more perturbed by the trend, highlighting how “financial conditions” — a measure of how stimulative markets are for economic growth — have tightened markedly recently, driven by rising short-term borrowing costs, choppier equities and the dollar’s resurgence.
“While the recent moves might just be a step up in tighter financial conditions, they might prove to be the first treads of an escalator,” said Bricklin Dwyer, senior US economist at BNP Paribas. “We remain optimistic that consumers and businesses will keep spending through the middle of the year, but remain aware that the peak may be behind us.”
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