It has been over twenty-five years since the conclusion of the Clinton administration that stocks have looked this costly in comparison to bonds.
Bonds, however, also appear better than they have in a while. One of the main conclusions of a recent analysis by bond giant Pimco is that, given the likelihood that the reorganization of international commerce and alliances during President Trump’s second term will continue, investors should position themselves in high-quality bonds.
Richard Clarida, a global economic consultant at Pimco and a former vice chair of the Federal Reserve from 2018 to 2022, co-authored a new five-year Pimco perspective that states, “In short, the traditional world order – in which economics shaped politics – has been turned on its head.”
“Politics is now driving economics, especially in the U.S. and increasingly in how other countries respond.” As stated by Clarida’s team.
In light of this, Pimco believes that instead of pursuing stocks at high prices, investors should start “seizing the yield advantage in high-quality bonds.”
Additionally, the team noted that the “equity risk premium” is currently zero, a situation that has only occurred twice in the last 70 years, in 1987 and 1996-2001.
By deducting inflation-adjusted 30-year Treasury bond yields from cyclically adjusted price to profits, Pimco arrived at its 0.2% equity risk premium.
According to the paper, the stock market saw a nearly 25% decline after the September 1987 incident of a zero equity risk premium, while 30-year real bond yields experienced a decline of approximately 80 basis points.
After a flat-to-negative equity risk premium took hold from December 1999 to February 2003, markets fell over 40% approximately ten years later.
According to the Pimco analysis, 30-year real bond yields decreased by almost 200 basis points throughout that period.
Longer-duration With current attention on the significant U.S. budget deficit and the probable need for new issuance to finance Republicans’ big tax-and-spending bill, which is still pending in the Senate, Treasury rates have been climbing during the second Trump administration.
According to FactSet data, the 30-year yield BX:TMUBMUSD30Y was close to 4.94% on Tuesday, which is close to the psychologically significant 5% level, while the 10-year Treasury yield BX:TMUBMUSD10Y was at 4.47%.
The Fed’s plans to resume interest-rate decreases appear to be on hold for some time due to tariff uncertainties. There have been worries that the economy would falter due to years of rising borrowing costs, which might lead to a rush to bonds and force the Fed to lower interest rates in an effort to save the economy. Strong Fed rate cuts may increase the scarcity and value of today’s higher bond yields.
On the other hand, stocks had recovered dramatically from their selloff caused by tariffs and were once again on the verge of reaching record territory on Tuesday. According to Dow Jones Market Data, the S&P 500 index SPX was up 0.4%, or roughly 2%, from its record of 6,144.15 established on February 19.
