For the first time in over 20 years, the traditional 60/40 stock-and-bond portfolio is paying out less than some of the most risk-free securities, reports an article in Bloomberg. The yield on 6-month U.S. Treasury notes climbed to 5.14%, notching it higher than the 5.07% yield on the standard portfolio comprised of 60% U.S. equities and 40% fixed-income securities, as gauged by the S&P 500 Index of stocks and Bloomberg USAgg Index of bonds.
It’s an emphatic indication of the impact that the Fed’s hawkish tightening policies have had by hiking interest rates higher and higher. The increase in payouts has also made it less appealing for investors to take risks on equities, particularly on the speculative investments that were so popular while interest rates were so low. Now, “hawkish policy is rewarding caution,” wrote strategists from Morgan Stanley in a recent note to their clients. The 6-month yield is just above the yield on 4-month and 1-year notes, which could be a sign of a political clash on the horizon over the debt limit when those notes become due. The yield on the 60/40 portfolio has also gone up as stocks have gotten lower, but not as quickly as the Treasury bills, the article details.
Aside from making investors less inclined to take risks, the higher rates on short-term Treasuries have also increased costs for those that use borrowed money and made using options on more expensive stocks much less cost-effective. It’s also slashed currency-hedged yields for overseas investors. Meanwhile, after a rebound at the beginning of the year, new economic and inflation data raised the forecasts for where the Fed’s rate hikes will peak and fueled a sell-off in stocks and bonds during February. While the 60/40 strategy fell 17% in 2022, it’s now gained 2.7% so far this year, according to Bloomberg.