Now on Sale: Risk

Yesterday US 10 year treasury bond yields fell back below 5%, ending the day at 4.97%. The recent rise in bond yields, coupled with the recent rise in the S&P 500 has brought the earnings yield on the S&P to within 58 basis points of the 10 year treasury.

At the start of the day, the S&P 500 was trading at a P/E of 18.01, in other words a 5.55% earnings yield. The "Fed." model holds that the earnings yield on stocks should equal the 10 year treasury, and thus the earnings yield falling below the 10-year would indicate that the stock market is (on average) overvalued.

AAA corporate bonds are trading at a yield of 5.65%, and Baa (lower quality) bonds are yielding 6.59%, spreads of 68 and 162 basis points over the 10-year.

I think it is safe to say that investors aren't asking for much of a premium to take on substantially more risk than the 10-year.