The Battle Of Risk Free Assets And What It Means For StocksAugust 22, 2014
When it comes to safe haven investments, the world generally invests in two assets: US Treasuries or German Bunds. Recently, bunds seem to be the preferred “risk-free” investment of choice by a wide margin which has historically been a negative signal for stocks .
10-year German Bund yields have fallen by 95 basis points since the beginning of the year and over the past week we have seen German 10-Year Bunds break below 1% for the first time ever. US 10-year treasury yields have dropped this year as well, however, not to the same degree as their German counterpart. US 10-year treasuries have fallen by 63 basis points year-to-date.
Because German yields have fallen faster than US yields, the spread between 10-year treasuries and 10-year bunds has reached a 15-year high. Over the past 25 years, a rising yield spread between the two government bonds has coincided with rising equity prices, however, approximately a 150 basis point spread seems to be the historical max between these two government bond yields. The spread between the two yields stands at 142 basis as of the US close yesterday. With limited room left to the upside in this spread, we view this as a warning sign for the equity market.