When the Federal Reserve (Fed) raises interest rates, the goal is to encourage investors to take less risk. Higher rates make it more attractive to move money into safer fixed-income investments like bonds.
In this context, the current convergence of yield levels across debt and equity markets is remarkable. Yields in fixed income have risen to levels not seen in many years, while the S&P 500 forward earnings yield and similar implied equity yields have been coming down.
Why Fixed Income Looks More Attractive
Currently, fixed income offers higher returns compared to the implied yields in public equity markets. This suggests that the market may be mispricing risk. Investors buying the S&P 500 today may not be adequately rewarded for the risks they are taking.
Key Takeaways
- Fed rate hikes make safe fixed-income investments more appealing.
- Yields in bonds are higher than they have been in many years.
- Equity yields, including S&P 500 forward earnings yield, are declining.
- Fixed income is currently more attractive than equities.
- Investors should be cautious as risk may be mispriced in equities.
Sources: Nareit, Bloomberg, Apollo Chief Economist
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