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As central banks around the world keep interest rates at record lows and purchase trillions in bonds, investors find themselves facing a "new normal," according to noted bear David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates.
"Back in the early 1980s, when the secular rally in both stocks and bonds began, you bought equities for capital appreciation and Treasuries for yield," he says in a note to clients on Thursday. "Today it is the opposite -- you buy equities for yield and bonds for the capital gain."
Rosenberg says investors who have bought long-dated treasuries in the last year -- even though they currently offer a record-low yield -- have been handed handsome returns.
"The bond bears scream 'Who would buy bonds at these ridiculously low rate levels?' Well nobody is buying them to lock in a stupid-low rate. Those who bought long-bonds this time last year did not do so because the yield was 3.7 percent. They did so because they believe that yields would drop and indeed they did…to 2.7 percent. That in turn drove bond prices higher -- to the point that the total return generated by the long T-bond has exceeded 20 percent in the past year," he says.
Rosenberg says the run for bonds may not be over, as he expects the yield on a 30-year Treasury to fall to 2 percent. Bond yields and prices move inversely -- the higher price an investor pays for a bond, the lower return he will receive on coupon payments.
In July, the yield on a 10-year Treasury -- the benchmark bond for investors -- fell to a record low of 1.46 percent.
But Rosenberg says investors have also turned to dividends as a way to preserve their cash flows – a trend that he also expects will continue.
"Looking at the average yields and payout rations -- far below prior peaks -- it doesn't seem likely that this theme is over, notwithstanding cries to the opposite that divide-paying stocks are expensive," he says. "At this stage of the cycle, when earnings visibility demands there to be a premium on 'defensive' stocks, and give the 160 basis points gap between the S&P 500 dividend yield and the five-year T-note yield – a wedge we haven't seen since 1958! – there is a good reason to have exposure to 'hybrid' investment strategies that embrace this income-equity theme."