Equities are Cheap Relative to High Yield Bonds

By on March 30, 2010

Businessweek reports that the relationship between the earnings yield on stocks and the income provided by junk bonds is at a point where equities are relatively cheap.

The lowest-rated debt pays 3.22 percentage points more than the earnings yield on the S&P 500, the smallest gap since 2007 and a discount to the average 5.93 points of the past 22 years, data compiled by Bloomberg show. The measure of profits compared with share prices shows stocks may be undervalued next to the fixed-income investments most closely correlated with equities.

Authors Lynn Thomasson and Bryan Keogh quote the views of Paul Zemsky, the New York-based head of asset allocation for ING, which oversees $550 billion, Bill Gross, manager of the world’s biggest fixed-income fund at Pacific Investment Management Co., and the Leuthold Group, whose $1.5 billion Leuthold Core Investment Fund has beaten 96 percent of its peers in the past five years at the source below.

Source: Businessweek

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