Government Bond valuation - Real yields vs History
EU 5-Year Real Yield
Insights | EU
Real yields are the actual returns a bond investor earns after accounting for inflation. They are the market’s hurdle rate. When the real yield rises, every other investment — stocks, crypto, or real estate — needs to return more to be compelling. If an asset can't significantly outperform this hurdle, investors drop it and rotate back into bonds.
CURRENT READINGS
The EU 5-Year Real Yield is very cheap at 1.08%.
For reference, its historical median value in Europe is 0.40%.
MARKET IMPLICATIONS
European Bond investors are paid very well after inflation: there is value in fixed income. Equities are under pressure to stay attractive - preferring stocks than bonds in such context is viable only in case of strong equity earnings and ongoing danger in fixed income because of rising inflation and/or tighter interest rates ahead.
US 10-Year Real Yield
Insights | US
The US 10-Year Real Yield acts as the benchmark discount rate for global risk assets. By analyzing where current real yields sit relative to their historical quartiles, we can gauge the fundamental macroeconomic pressure being applied to stock multiples.
CURRENT READINGS
The US 10-Year Real Yield sits at 2.23%.
The historical median value is 1.02%.
MARKET IMPLICATIONS
Lower real yields ("expensive" quadrant) historically correlate with higher equity valuations, as the opportunity cost of holding stocks is diminished.