INSIGHTS

On May 31, 2012

10-Year Treasury Yield Falls on Eurozone Woes and Disappointing US Growth Data

As the 10-year Treasury note hits a record low yield, more and more investors are searching for investments with more yield. The 40-year chart below illustrates the 10-year Treasury typically has a higher yield than the S&P 500 dividend yield. The dividend yield of the S&P 500 is near 2.16% and the 10-year Treasury yield is now near 1.6%. Obviously, this hasn’t occurred often in the past 40 years and the chart below reflects the bull market that bonds have been in since the early ‘80s as yields have dropped from the teens to less than 2%.

The latest Eurozone uncertainty has created another flight to quality that is evidenced by the 10-year Treasury yield dropping from approximately 2.37% on March 19, 2012 to the new record low. That’s a 77 basis point move in less than three months. If these notes reverse course, a move back to a 2.37% yield could cost an investor nearly 7% of their principal.

We understand that yields could get even lower, but we remain in the camp that Treasuries offer rewardless risk over the long term. We continue to believe that investors should consider stepping down the credit scale (while staying within their risk tolerance) and looking at securities such as dividend paying equities, preferred stock and taxable municipal bonds.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at ~/blog/about/disclosures. For additional commentary or financial resources, please visit www.aamlive.com