Bond yield and shares

Posted: August 21, 2013 in Uncategorized

Quite a few clients ask me what is the relationship between bond yield and shares.

Simplifying a bit I came with an answer

The link between bond yield and shares is a bit complicated….but I will try to simplify.
First of the yield (dividend) on share in the world is approximately 2%pa (not like Australia on average 4.5%pa)
The big movement in the markets are caused mainly but the so called called (internationally) sovereign fund (includes international pension fund and Government “liability” funds (let’s say where the Government park their money from which you get paid medicare rebates, public pension, benefits…specially US and European).
The mandate of these funds is actually to “discharge a benefit”. In order to discharge a benefit they need income. Until the bond of US treasuries (more secure than share) was approx 1.7%-2.2%pa these funds were compelled to invest in share as the yield in bond was not enough to pay their liability. Once the yield in bond come close to 3%, there is a clear advantage in bond (safer and better yield). So these funds have to follow their mandate and divest from shares and invest in bond. Potentially this move could happen in the week of 2 September (after US Labor Day all the big banks boards come back from holiday)
Due the sheer mass of these funds such a move can create a worldwide correction in the market of approximately 5-10%pa. As everything nothing is certain as the Federal Reserve knows this and can limit the damage. But we cannot trust the deeds of the FED (also called market manipulation).

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