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The Stock Versus Bond Debate

The stock versus bond debate has been all the rage in the last few months.  The battle can get heated as deflationists battle inflationists.  The problem is that they are missing the forest for the trees.  Bonds are not magic instruments.  The current yield on a bond generally is very close to what you should expect as the total return for that investment:

Do you like the current yield of treasuries?

This means that if you want to hold onto bonds, you had better like the current yield to worst of the bonds that you are buying.  At a 2.5% 10 year treasury yield and 4% investment grade 10 year corporate yield, I cannot say that I am thrilled.  As an alternative we have the unloved equity market with a 10% earnings yield.  If we want to be skeptical, then let us do some simple historical math comparing investment grade corporate bond yields to S&P 500 earnings yields:

Do you see an outlier?

Trading and investing are all about relative value.  Whether you believe that earnings are going to persist or not, the value proposition in stocks is historically much greater than the value proposition in investment grade bonds.  Why would you buy a 2.5% treasury when you can get 2% in dividends from the S&P 500?  Volatility you say?  Then sell at-the-money call options and get the yield on stocks up to 6% and greater.  Likewise, switch to dividend paying stocks and cover them for a juicy 10% yield.   I dare you to find a fixed income alternative that can with greater yields and less long term risk.

Posted in Derivatives, Economics, Markets, Trading Ideas.

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Copyright © 2009-2013 SurlyTrader DISCLAIMER The commentary on this blog is not meant to be taken as an investment advice. The author is not a registered investment adviser. There is no substitute for your own due diligence. Please be aware that investing is inherently a risky business and if you chose to follow any of the advice on this site, then you are accepting the risks associated with that investment. The Author may have also taken positions in the stocks or investments that are being discussed and the author may change his position at any time without warning.

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