Are Bonds a Better Buy than Stocks?

By on June 28, 2009

Bernard Condon, writing for Forbes, makes the case for bonds (especially corporates) over stocks. The bond bulls, including David Rosenberg, Jeremy Grantham, Simon Ballard, and Steve Romick, claim that anemic economic growth prospects make bonds the better buy. The bullish case for bonds assumes that default rates will not reach the 8% level that is currently priced in, according to Ballard.

Condon compares historical P/Es of various world markets (U.S. 16, China 28, Sweden 20, Continental Europe 13) to bolster the case for bonds.

Condon writes, “Since 1926 the equity premium has averaged 6.5 percentage points above the rate on long-term Treasurys, according to Ibbotson Associates. The 3.8% yield currently on ten-year Treasurys implies that stocks will have to deliver total returns in the double digits to prevent investors from fleeing to other asset classes. That would require the S&P 500 to outdo its own performance over the past half-century of 9% average annual gains.”

Condon, in reaching his conclusion, states, “Corporate bonds look like better values than either Treasurys or equities. In November the spread on investment-grade corporates peaked at 6.1 percentage points over comparable Treasurys. The implication was that the world was coming to an end. The world is still here, and the yield spread has narrowed to 3.1 percentage points, according to Barclays Capital. Even so, it’s still wider than the 2.5 percentage point peak in 2002 amid the previous recession. To justify today’s level, this recession would have to get far worse (and presumably take down stock prices with it).”


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