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A classic characteristic of the financial market is the inverse relationship between the price-to-earnings (P/E) ratio and bond yield rates. The 10-year Treasury rate is backed by the printing press of the U.S. The quality of government paper can be argued, given the current economic pressures, but in theory treasuries are seen as “risk free”. With COVID-19 intensifying in the biggest economy in the world, we are experiencing an extraordinary period of volatility. Over time, we have seen the US 10-year treasury yield and P/E ratio display significant movements, along with the market. It is safe to say that the relationship between these two are unstable over time. However, in recent years, there has been an immense distortion between the two. It appears as if investors tend to prefer owning equities or bonds for a given set of interest rates. As such, the market is over-priced and might be pricing in risk given the current rates. |
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