Government bond yields have fallen so much over the last few years that we are now seeing an unusual phenomenon.
Buy bonds for income and equities for growth. That is what many a financial adviser will tell you. But it isn't really true any more. According to Citigroup, the dividend yield on the equity market is higher than the 10-year government bond yield in Australia, Canada, France, Germany, Japan and the UK. In the US, the two yields are neck-and-neck but equity investors can get an extra cashflow boost from buy-backs.
The current pattern contrasts with that of the last 50 years, when equities usually yielded less than government bonds because of the potential for the dividends to grow.
It is, however, similar to the pattern in the first half of the 20th century, when equities also tended to yield more than bonds.
So the big question for investors is; are we going back to the 1970s and 1980s? Or will markets look more like the first half of the 20th centuty? If the former, sell the bonds as fast as you can. If the latter, then this seemingly strange relationship will last. Equities may turn out be the best income provider.