Chart of the Week: Stocks as Bond Proxies

This week’s chart comes from yours truly. For much of the year, and especially so since Treasury yields broke to new lows after the Brexit vote, the “safe” high yielding stocks like Utilities, Consumer Staples and Telecom have been tracking daily changes in the bond market – not the stock market. If bond yields move lower, these stocks move higher. It’s a pure comparison of dividend yields vs bond yields only; all other pertinent pieces of information (like company or economic fundamentals) are ignored.

Our bond yields are being driven by international government bond yields, which are being driven by poor economic numbers, market uncertainty and endless central bank buying. Over $12 trillion of global government bonds now trade at a negative yield, including the entire Swiss government bond yield curve! It’s acting like a vacuum pulling global yields on all assets lower (and thus prices higher) as money looks for any place to hide with a positive yield.

I make no claim as to when this will end but I was meeting with some clients yesterday and told them this is starting to feel like one of those times that will eventually end with investors (that continue to participate in the mayhem by chasing yield in these stocks) looking back and saying “What was I thinking?…”

30 year Treasury (black) vs. Utilities (red), Staples (blue), REITs (green), Telecom (purple) and Gold (tan) – 3 month chart

It behooves investors to understand the risks behind their investments. For the stock sectors mentioned above, you now have stock market risk and bond market risk. We rode this wave to some nice gains in a handful of these stocks but I definitely don’t want to overstay our welcome.

-Nick