Economist Jeremy Siegel says 30-year inflation-protected Treasury bonds now pay a real return near 3.35%, cutting the edge stocks hold over bonds to about 1.65 percentage points.
Key Points:
- Siegel says the 30-year inflation-protected Treasury has not yielded this much in 20 to 30 years.
- He argues higher borrowing costs hurt thin-margin companies far more than the largest technology firms.
- He wants two more Fed rate increases this year, possibly a half point in December.
Siegel Bond Math
Siegel, an emeritus finance professor at the Wharton School and senior economist at asset manager WisdomTree, said in a television interview that the 30-year bonds have not yielded this much in 20 to 30 years. The securities, known as TIPS, pay a fixed return above inflation.
By his math, a stock market valued at 20 times earnings returns about 5% above inflation. That leaves roughly 1.65 percentage points of extra reward for taking equity risk. The gap is narrowing, though stocks still beat bonds, he said.
Ordinary Treasury yields are climbing too, with the 10-year note touching 5.33% on Thursday, its highest level since 2002, before easing to around 5.24%. The 30-year rate also hit its highest level since 2002 as persistent inflation, heavy government borrowing and strong growth kept rate expectations elevated.
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Magnificent 7 Margins
Siegel reportedly put profit margins for the Magnificent 7, the mega-cap group led by technology companies, at 50% to 70%, compared with 7% to 10% for companies outside tech. Higher borrowing costs therefore claim a bigger share of those thinner profits, and he argued that has stalled the first-half rotation into broader stocks. About 75% of S&P 500 stocks fell in September, FactSet data shows.
Siegel Fed Outlook
Siegel also said the Federal Reserve needs two more rate increases this year, while the central bank's own projections point to one. He reportedly suggested Chair Kevin Warsh could skip the Oct. 27-28 meeting, which ends six days before the midterm elections, and raise rates by a half point in December.
Fed leaders are signaling patience. Vice Chair Philip Jefferson said Thursday that colleagues may need more time to judge their next move, after a quarter-point increase in mid-September lifted the target range to 3.75% to 4%. Traders now see about a 25% chance of an October hike, down from about 70% earlier in the week.
Siegel has tracked the shrinking stock premium for months, and in early June he put real yields near 2% and the advantage of stocks at 2.5 to 3 percentage points. On Sept. 28 he wrote that 10-year real yields had approached 2.8% after climbing roughly 40 basis points in three weeks, making bonds a far more serious competitor.
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