NEW YORK: For nearly nine years, the global hunt for yield sent you to one place: the US stock market. On Friday, stocks took their biggest pounding since September 2016, before US President Donald Trump was elected, after the US government’s monthly payrolls report showed the biggest wage gains for workers since 2009. That convinced investors the threat of inflation, long tame since the 2007-2009 recession, is growing larger, sending bond yields soaring.

With central banks having taken extraordinary measures to combat the financial crisis, driving interest rates to record lows and making safe assets like US Treasuries a scarcity, investors of all stripes were forced to turn to equities. But when what had been a stealth increase in US rates over several months suddenly broke out into the open in the last week, investors were jolted awake to a new reality: stocks are no longer the only solution for finding yield.

“One of the key mantras of the bull market has been stocks are inexpensive relative to bonds, and bonds are getting cheaper, especially at these highs,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut. “So people are taking profits and they probably should be.” With the yield on the benchmark 10-year Treasury note on pace to top 3.5 per cent this year for the first time since April of 2011, risk-free bonds are becoming an increasingly attractive place for yield-focused investors.

At the current forward price-earnings ratio of 18.2, according to Thomson Reuters proprietary research, the S&P 500 index’s earnings yield is 5.5 per cent, well below the historic norm of around 6.7 per cent. With bond yields rising across the spectrum, the 5.5 cents of profit that underpins every $1 in share prices on average begins to look thin by comparison.

“We don’t have a line in the sand but 10-year Treasuries near 3 per cent are starting to look a lot more attractive,” said Mike Dowdall, a portfolio manager with BMO Global Asset Management.

That rise in yields prompted a broad sell-off in stocks on Friday, as investors reacted to data from the US Labor Department showing wages last month recorded their largest annual gain in more than 8-1/2 years.

Equities continued a five-day downward trend, with the S&P 500 sliding more than 2 per cent for its largest one-day decline since September 2016. The Dow Jones Industrial Average lost more than 2.5 per cent.

Meanwhile, a sell-off in bonds that has gathered pace this year intensified, with yields on 10-year Treasuries hitting a four-year peak.

That dynamic is putting pressure on areas of the market that had served as bond proxies. As a result, fund managers are rediscovering the risk of rising rates, selling out of assets ranging from high-yield “junk” bonds to utility stocks and pushing the broad S&P 500 lower.

Warning signs for equities have been long discussed, as the market hit almost daily fresh highs. On Friday, Merrill Lynch’s bull-bear indicator, which has accurately predicted 11 out of 11 US stock market corrections since 2002, hit a “sell” signal.

The rise in bond yields is “certainly beginning to concern the markets,” said Nicholas Colas, co-founder at DataTrek Research in New York. “Rates have risen fairly quickly this year and the speed of the advance is worrying.” The yield on the 10-year Treasury has risen to 2.84 per cent from 2.46 per cent at the start of the year, the swiftest rise since November 2016.

Reuters