- Stocks aren't the only game in town for investors now that interest rates have surged.
- Bank of America said that as the 10-Year US Treasury yield approaches 5%, stocks will look less attractive to investors.
- "We expect US rates to keep rising until negative feedback from real economic slowdown, risk assets, or enough cuts are priced out."
Our Chart of the Day is from Bank of America, which highlights the relationship between the S&P 500's earnings yield and the 10-year US Treasury yield.
The S&P 500 earnings yield is the reciprocal of the price-to-earnings ratio and helps investors understand how much company earnings they will receive for each dollar invested in the market.
The chart shows that the two yields are converging at about 5% and are at the narrowest gap they've been at since at least 2005. That means bonds are finally giving stocks a run for their money, as investors now grapple with the fact that there are many alternatives, or "TAMA," with risk-free interest rates so high.
That's counter to the era of near-zero interest rates after the Great Financial Crisis, when the mantra of there is no alternative [to stocks], or "TINA," was echoed throughout Wall Street.
Bank of America predicted Treasury yields could continue to surge higher, with the 10-year rate potentially hitting 5% and staying "sticky" at that level as it competes as a viable alternative to stocks. The 10-year US Treasury yield hit a cycle-high of 4.59% on Wednesday.
"US Treasurys are an increasingly compelling alternative to risk assets, in our view. We expect US rates to keep rising until negative feedback from real economic slowdown, risk assets, or enough cuts are priced out," Bank of America's Mark Cabana said in a Wednesday note. "The path of least resistance is higher rates."