Less risk, more return in short-term bonds

By USAA Investments

Rising interest rates have made bonds more attractive relative to stocks, particularly at the short end of the curve where rates have gone up the most and bond prices are less exposed to the negative impact of rising rates.

For years, income-seeking investors have been buying stocks in order to collect dividends that have been greater than the yield on short-term bonds. The chart below compares the yield on the 2-year Treasury with the S&P 500’s dividend yield.

Beginning when the Fed slashed rates in the aftermath of the financial crisis, the income return of the S&P surpassed the Treasury bond for almost a decade – this trend ended in late 2017 and has continued into this year.

This week, the 2-year Treasury yield is around 2.3%, while the S&P’s dividend yield is a bit above 1.9%.

This is significant for investors, who for the first time in nearly a decade have the option to reduce their portfolio risk by cutting back on stock holdings without sacrificing income.