From TINA to TARA

There isn’t really any alternative to the equity market when it comes to generating a positive real return, or so it was said of equities, especially in the (extremely) low interest rate environment of the past decade. In the ten years between (the start of) 2012 and (the end of) 2021 the yield was 5.8% for the S&P 500 on average compared with 2.0% for 10-year U.S. Treasuries. In other words, the latter just about made up for the rate of inflation. Of course, comparing the yields of top-tier sovereign bonds and the equity market is flawed because it ignores the different risk profiles. However, even U.S. corporate bonds that were hovering on the brink of junk status (BBB bonds) only yielded 3.6% on average in the same period.

Due to this pressure on real yields to show returns, even rather conservative multi asset investors, such as insurance companies, were in recent years forced farther up the risk curve. Consequently, exposure to the bond market was reduced in favour of the equity market. These inflows propped up the equity market in the past and the phenomenon was referred to as TINA (“There Is No Alternative”).

However, the tailwind behind the relative attractiveness of equities over bonds died down in 2022 – firstly, because the central banks rapidly increased interest rates in order to combat inflation (and will further increase them) and, secondly, because the risk premia have recently increased sharply once again. 10-year U.S. Treasuries are now trading above 4% and BBB U.S. corporate bonds are yielding around 6.2%. The latter have thus passed the expected yields for the S&P 500.

Admittedly, this only looks at the U.S. and the European comparison of yields is different, but the trend is clear: the years of “there is no alternative to equities” are ending and bonds are likely to play a greater role once again in institutional investors’ multi asset allocation – thanks to TARA (“There Are Reasonable Alternatives”).