Strong economy - higher or lower real bond yields?

The question is in the subject.

  • When the economy is strong, the stock market is more attractive than bonds, so bond yields have to be higher to get the investors attention?

  • In advanced economies, however, I notice that rates are quite low and bond yields are also low.

So lower yields and lower rates are the way to go?

It’s better to think of it as a secondary market, than an issue.

When people have less demand for bonds, and more demand for stocks in a booming economy, the price you would pay for a bond is not that high anymore, so it’s clearing market price goes down, and if the price is lower, then it has a higher return on investment (yield).

Bond yields are lower in a strong economy, but they are also low for it’s stock market. Notice that there is a difference between yield, and reuturn. Yield takes into account how much you paid, or the relative price to return, while return is just an absolute value.

When the stock market is growing fast and making high returns, you’re aggregate P/E might be in high double-digits, meaning that even though the underlying companies are making a lot of money, you will also have to pay even more money to get part of that lot of money, so you’re yield might actually be lower than a normal growing higher risk stock market.

Same concept applies for bonds. It’s usually uncommon to find a big divergence between equity and fixed income yields, although they tend to widen/tighten over sparse intervals. So think about the interest rates of the econonmy as a whole based on the capital stack. Usually low yields on one implies low yields on the other during stable trend growth.

Thank you MrSmart,