New York: A decline in interest rates on long-term US government bonds below the average stock dividend yield could be a reason global stocks could find support this week after a bruising month.
While yields on intermediate-term US bonds have been below the S&P 500’s dividend yield for several months, the 30-year yield inverted at the end of August, the first time since March 2009.
The S&P 500 then got off to a fast start in September, erasing its 1.8 per cent decline in August, partly due to gains in sectors such as energy where stocks have high dividend yields.
“At some point, an absolute thing kicks in and you, ‘Well, where am I going to get my income from?’ and the income-producing stocks, the yielding stocks are an attractive place to go,” said Thomas Martin, senior portfolio manager at Globalt Investments.
And those gains in stocks could continue this week as the argument for another round of cuts in interest rates by the US Federal Reserve gets more support, following weaker than expected jobs data.
Jobs data on Friday showed that the US added 130,000 jobs in August, lower than the 160,000 expected for non-farm payrolls.
“Concerns over weakness in the US labour market threatening consumer spending should fuel speculation over the Fed cutting interest rates again beyond September,” said Lukman Otunuga, research analyst at FXTM, in a note.
In August, the S&P 500 suffered its first monthly drop since May, as investors fretted over the inverted yield curve for Treasuries, an indication seen by many as a harbinger of recession.
And it wasn’t the only index to end lower. Each of the three major Wall Street indices saw declines in August, and that may tempt investors to look elsewhere especially as September has been the worst-performing month since 1950, according to the Stock Trader’s Almanac.
Still, higher dividend yields compared with government bonds could provide some incentive for stocks.
“It’s pretty clear that the $17 trillion (Dh62 trillion) in negative-yielding bonds have been a black hole that sucks yields lower and lower in the US,” said Don Ellenberger, head of multisector strategies at Federated Investors.
— With inputs from Reuters