The 10-Year Treasury Note is back at 4.00% for the first time since June 2009.  The 30-Year is still under the 5.0% hurdle, but both of these levels may need to be watched here.  This watch is not the notion that hyperinflation may kick in immediately, nor that economic growth is about to go through the roof.  This alert is over the notion that bonds could once again begin to compete against stocks for new assets now that yields have risen.

The notion that stocks would face competition from bonds is based upon each new higher percentage rate on the longer dated note and bond maturities.  Locking in at 4% or at 5% for a period of 10-years to 30-years may be of little interest to younger risk takers.  But those who are trying to lock in certain returns or make estate planning may settle for “the riskless return” of the notes and bonds.

If you ask market pundits such as Bill Gross and many others, the caution exists that stocks may offer muted returns after seeing such strong recoveries in the major stock indexes. The S&P500 Index is up over 80% from trough in March 2009 to the current levels.   There is also the notion to consider that sovereign entities may have to pay higher rates of return in the future to deficits and spending levels at critical levels.

The ultimate hurdle is 5.00% for the 30-Year Treasury Bond.  At 4.85% today, we are not yet there.  Last June we saw the yield hit a high of 5.07% in June 2009.  Will that create waves of equity sales just to get a cool 5.0% return locked in for 30-years?  Of course not.  But that could in fact draw income investors to look at the riskless trade.

To show just how fast rates can rise if the fundamentals and mechanisms governing the capital markets come under pressure, the 10-Year rose to 4.01% in early-June of 2009 from 2.80% in late-April; and the 30-Year rose to over 5% in the second week of June-2009 from about 3.80% in the last half of April.

Then of course there are stock yields.  Most large companies are under pressure to raise their dividends now, and Indexarb.com lists the average dividend yield as being 2.69% if you include the zero-yield from Cisco.

It seems hard to get excited about the 4% for 10-years or even almost 5% for 30-years, but that will start to being in some investors who have not been able to get these bond yields for years.

Yes, there are still those risks of inflation, higher costs to borrow on top of trillions and trillions of deficit spending, a shutout for half of borrowers and on and on.  The level that will make investors pursue asset allocation changes out of stocks into bonds is of course as random or diverse as there are actual investment strategies.

The 10-Year hit a high just over 4.30% in June 2008 and was last over 5% in July 2007.  Before that yield cycle peaked, Summer 2002 had been the last time the 10-Year was above 5%.

The last time we saw a 5% handle on the 30-year T-Bond was June 2009.  Before that was August 2007 and then a prior rate cycle peak over 5% had been in December 2004.  The long bond yielded 5.5% last in July 2004 and you have to go back to 2000 to see 6.0% yields in the Long Bond.

JON C. OGG

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