Stocks Are Crushing Bond Returns, But A Reversal May Be Imminent
By Paul Rubillo ·
Callum Thomas posted a chart (see below) this week that I would advise bond investors to look away from: the rolling 10-year total return spread between the S&P 500 and Treasuries just pushed toward levels not seen in over 50 years.
Stocks aren't just beating bonds, they're beating them by a historically extreme margin.
The instinct is to read that as more bad news for anyone holding bonds. The contrarian read is the opposite, and history actually backs it up.
What the chart is really measuring
It's a rolling 10-year comparison, meaning the current reading reflects a full decade of stocks compounding faster than Treasuries. When that spread gets stretched this far beyond its long-term average, It's describing an imbalance that has, every single time in the last 140 years, eventually corrected.
Reversal reason one: extremes in this chart have never just kept going
Look at the prior peaks. Late 1920s, late 1960s, right around 1999-2000. Every one of those spikes marked stocks at their most dominant relative to bonds in a generation, and every one of those spikes was followed by a decade where things reversed. The 1970s and the 2000s in particular were rough enough for equities relative to bonds that an entire generation of investors got called "bond people" for having lived through it.
Reversal reason two: the starting point actually matters this time
Unlike 2020, when Treasuries were sitting at yields near zero and had almost no cushion left to offer, today's 10-year is starting this potential reversion from around 5%. A bond investor buying in today is getting paid a real coupon while they wait. This is a fundamentally different environment than the last time bonds were this unloved.
Reversal reason three: stretched valuations don't fix themselves quietly
Every one of the historical peaks in this chart lined up with equity valuations that had gotten well ahead of fundamentals. Valuation extremes don't require a crash to resolve. A long stretch of underwhelming forward can also be in the cards. Either path tends to close the gap from the equity side as much as the bond side. A bond investor doesn't need stocks to crash to be vindicated here. They just need stocks to stop compounding at an unsustainable pace, and reversion of any kind moves this chart back toward its average.
The historical perspective worth remembering
Markets that look permanently broken rarely are. We've talked about the "this time is different" crowd in 2020 who thought yields were pinned near zero forever. We've talked about 1981 and what it actually took to break an inflation psychology that felt unbreakable at the time. This chart is running along that same storyline. Two asset classes that have swung to an extreme, and a market that is currently very confident the extreme is the new normal.
The bottom line
Any analyst will tell you that extremes (and valuations) can stay stretched longer than feels reasonable, and this one hasn't shown any sign of cracking yet. A bond investor looking at this chart isn't looking at a market that's permanently forgotten how to value fixed income in a historical sense. Having an actual yield that gets investors paid fairly well while they wait for things to play out makes it easier for a reversal to begin to materialize. Laddering in is a strategy that helps avoid any unnecessary line-in-the-sand positioning. Picking tops and bottoms is a fool’s game. We know our readers here at TreasuryBonds.com are no fools!