Great question and one which is difficult to answer without some detail, but I'll try.
There are two points to consider:
1. What is meant by "mean reversion" of bond yields.
2. The history of the spread of TCL's yield over bond yields.
Let's start with the first issue, i.e., what is the equilibrium level of the bond market (i.e., what is the "average" bond yield) to which the world might revert?
A short study of the history of the bond market shows that there is no average; rather that bond yields have, for as far back as reasonably reliable records have been kept (which, for US 10-Year Treasuries, is close to 230 years ), traded in distinctly different patterns for discrete periods of time, each period spanning several decades.)
As the graphic shows, through most of the 18th centuries yields essentially underwent on slow, secular downtrend, from around 7% at the start of the century, to around 3% by the end of that century, punctuated by a 2 or 3 spike of the order of magnitude of 100 to 150 bps (but these were all short-lived, lasting for 2 or 3 years)
From the turn of the 20th Century, two decades of global economic prosperity, and post-WW1 inflation, saw yields rise from 3% to 5.5%, soon to reverse once the inflation from post-war reconstruction activity had abated.
The Great Depression simply added to the momentum in the bidding up of bonds, and their yields kept falling all they way between the WW1 and WW2 (a 25 year- period), culminating at under 2% by the time Germany had surrendered in 1945.
After WW2, a recovery in war-ravaged economies, as they re-create destroyed economic capacity sees bond yields rising steadily, and in the next 30 years, a confluence of events (rising incomes in the western world due to industrialisation and an acceleration of technological developments, the Vietnam war and a series of oil price shocks) leads to hyper-inflation in the late 1970s, and bond yields reach double-digits for the first time ever and peak in the mid teens.
A global economic slowdown the 1980s, plus the great productivity breakthrough as a result of computing technology in the 1990s (as well as the global recession of '91/'92) keeps a lid on inflation during this period. And during the latter part of this period government policies that lower trade barriers and encourage globalisation mean that the factors of production become far more mobile, further serving to cap inflation and keep bond yields under pressure.
Of course, in the early 2000s the tech bubble bursts, inducing a synchronised economic slowdown in developed economies that lasts until 2003 when the US invades Iraq and the commodity bubble takes off.
But the point is that for this next 20-something year period, yields fall in an almost straight line, from deep in the double digits in 1980, to 3.5% by 2003.
But, because of the strength of the deflationary forces of globalisation and the advent of the internet, not even record high commodity prices can re-kindle the inflation flames. Yields rise a mere 100bp over the course of the commodity boom and the great spurt of global synchronised economic growth (lead by US housing and China) between 2004 and 2008.
And then we have the not-so-small event of the GFC in 2009, followed by the Greek debt crisis, all leading to, well, we know the rest... bond yields currently at around 2.5%.
So, against this fascinating backdrop, what does mean reversion mean?
One way to look at it is to say, "Well, because of the long duration of each discrete period of bond market behaviour, the very long term history is not meaningful. (So much changes in the world - politically and economically - over a period of 20 or 30 years, so let's confine our reference period to just contemporary history, so say, the last 20 years).
But even the last 20 years can be divided into 2 discrete periods: Pre-GFC and Post-GFC.
Pre-GFC saw yields on Australian 10-Year bonds average around 5.5%, with peaks hitting 7% during the spike in commodity prices in 1999 and when the housing market was booming.
Post-GFC yields have averaged a mere 3% to 3.5% (and that's despite some of that period (2010 to 2013) include a very robust commodity price environment which drove a lot of domestic economic stimulus)
So, what's an analyst to do when assessing an appropriate bond yield?
Does one accept the pre-GFC 6.0% level as the "mean"?
Or does one say, "The GFC was a defining event whose effects - given all the debt that has been created in its aftermath - will linger for another decade, and therefore 3.0% is the new "mean"?
Or does one take an average of the two levels, i.e., 4.5%?
It is hard to know, but one thing is for sure, given the developments in debt markets since the GFC, even if he proves to be Trump The Great Reflationist, I don't think we will see yields above 6% again any time soon: the system simply won't be able to absorb it.
So, my approach is to use the average, i.e., 4.5% as the level to which yields might revert, and then to run a downside scenario check for bond yield at 6.0%.
This takes us to Point 2 from above, namely the spread of TCL's yield over bond yields based on precedent.
From Series E, it can be seen that the TCL DY spread over the 10-Yr Bond Yields has averaged around 1.0% since TCL recommenced making distributions after the acquisition of Hills Motorway Group.
Since the GFC the average has been more like 1.5%, before the stock price started falling from around the middle of this year, resulting in the YTD spread averaging 2.5%.
Marked-to-market today, the spread is at a record 2.7%.
Clearly, the market - being the forward-looking beast that it is - is already anticipating something, either a sharp drop in the DY or a rise in bond yields.
And given what we know about the company's project pipeline, and about the pretty reliable outlook for growth in Free Cash Flow (and hence, distributions), it is a rise in bond yields that is already being factored into the share price, to some reasonable degree, it seems.
The next important question to ask is, well, what sort of prospective bond yields is being factored into today's share price?
To answer this, lets look at the prospective Dividend Yield over Bond Yield spreads for the next few years:
On 2018 figures, TCL's divided is forecast to be 58c, implying a 6.0% DY.
Assuming the 1.5% historical average spread of 1.5% (note, it is actually 1.0%, but let's used the higher post-GFC figure in the interests of conservatism), this solves for an implied Bond Yield of 4.5%
Similarly, for 2019, TCL's forecast 68cps distribution equates to a 7.1% DY based on the current share price. This, in turn, solves for an implied Bond Yield of 5.6% at that point in time.
So, my conclusion based on the above, is that the share price fall in recent months is already pricing in a material fall in the bond market, and an attendant rise in bond yields.
Of course, the market - in its inimitable way - might simply adopt the indiscriminate view that Trump-flation is around the corner and automatically sell anything that vaguely resembles a bond.
In which case TCL's share price will continue falling.
But I have long ago learnt that I can't successfully invest around sentiment for the simple reason that it is such a fickle phenomenon; so instead, I try to focus simply on business fundamentals and valuation, and allow sentiment do whatever it wants to do.
I think this particular hamburger is cheap at the current price; if the price falls more, I'll simply buy more of these hamburgers.
TCL Price at posting:
$9.55 Sentiment: Buy Disclosure: Held
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