Specifically: “When yields on corporate bonds are lower than dividends on stocks, that unnerves me”
As an investor, why would you get unnerved at the above? My take is as follows: yields on bonds (interests/price - losely speaking) being higher than dividend yield (dividends/stock price) implies that the price of bonds is too high. Given that money usually flows out of fixed income to equity when times are good, does a higher fixed income imply that people are still being cautious and keeping their money in bonds or that he feels that people perceive stocks to be undervalued i.e. still have some room to run-up. Given the recent rate hikes, this would imply that bonds should be dropping in price - does a higher price imply that the markets are not pricing it in correctly?
Just throwing it out there - any thoughts would be appreciated.
First, keep in mind that as a bank CEO, Lloyd benefits from higher interest rates through better business prospects for his company. Banks make more money when interest rates increase, due to higher net interest margin, and the fact that companies are more motivated to use diverse means to raise capital. Most bank CEOs have made some kind of public comments to complain about low interest rates. While this does not necessarily degrade his argument, we should be aware of his potential motivation for making these comments.
Second, many people in the finance community are concerned that the economy, at least in their memories, has never experienced such a long period of low interest rates. There is much less room for monetary policy accommodation today compared to in the past. If a 2008 style crisis were to happen today, its effects would be extremely unpredictable. This is one reason why central bankers are so eager to raise interest rates and “normalize” policy as quickly as is practical.
Third, his comments regarding a potential asset bubble apply to stocks, not bonds. Because S&P 500 dividend yields are higher than investment grade bond coupon rates, more people have invested in stocks, sometimes using leverage (effectively, short bonds to buy stocks). Why would you not? Not only would you earn the dividend on those stocks, usually at a more favorable tax rate than bond yields, but you have the potential for capital gains. However, this is a signal to some people that stocks are overbought. A rapid increase in bond yields would be negative for most stocks, as company interest expenses would increase.
I’m not as concerned as some people with all this, but this is the context of his comment.