Inflexion point?, page-3

@madamswer and @hammer777

I do agree that, if nominal bond yields keep rising, broad equity index prices should start getting damaged before too long. There simply is a point where the earnings yield spread over the benchmark bond yield gets too tight to justify the risk of holding equity risk (or so goes the theory, at least).

One aspect that I think is worth paying attention to is the decoupling between nominal and real government bond yields, in the long end of the curve. If we look, for instance, for the nearest date in the past when the 30-year US Treasury yield was at its current level of 2.96%, we find October 26th 2017; on that date, the 30-year TIPS (inflation-linked) yield was 1.00%, today it is just over 0.80%.

I know, it is not Australia (things haven’t really been that different here, there are just less published data to compare), but I’m sure you see where I’m getting to: the long end of the curve, which embeds all the expectations on the future path of rates, is pricing in that the rise in nominal yields will lag the rise in CPI inflation.

If such a scenario does materialise, it is not obvious how any given individual stock price will react (I personally disagree that inflation is generally good for stocks, but this would require a longer discussion).
Nonetheless, it does seem very sensible to me that, under that scenario (nominal yields going up and real yields going down), toll road operators with traffic volumes inelastic to inflation will outperform the general market, given the explicit linkage of toll escalation to CPI.

That might explain why TCL securities, as well as other high-quality infrastructure stocks, have held up pretty well in price through the recent bond selloff. And, if the decoupling continues, it is not inconceivable that these stocks may go up in price while nominal bonds and broad equity indexes go down.