The bigger idea is that there is some yield that would entice an investor to sell stocks in favor of bonds. For example, if 15% for long dated treasuries were ever available again, a lot of people would dump their stocks and take that yield.
I heard part of a discussion on Kudlow that the Fed model called for stocks to be at equilibrium to bonds at a 5.13% ten year yield. The speaker said that using this model, stocks are currently undervalued. The big watch-out with relying on this too much is that stocks can remain undervalued or overvalued for years. In my opinion this offers no predictive value whatsoever.
While I have been expecting a correction in stocks for months, I don't think 5% or even 5.1% will be the tipping point for a lasting decline. The S&P 500 (SPY) is up more than 8% YTD, including the dividend. Given the tendency to project past return forward, I don't think that the allure of an extra 20 basis points is really much of a hook. But of course, I could be wrong.
Perhaps this could cause a rotation within the bond market to lengthen maturity as a more likely first step. I would think that yields will normalize and that the middle of the curve will work its way back into the sixes, but I am not sure how long this should take. Getting 6.25%, for example, would be much more competitive for me versus stocks. At some point above 6% I could see moving 5% from equities to bonds, above 7% a little more, and 8% or above, even more.
Of course the details would depend on whats happening all over but the thought process is very simple, at some point (different for everyone) bonds become cheap and the weight should be increased. If yields never go up, I will stick with short maturities and the current weightings.
It makes sense for you to think about this now before it happens, so you are prepared to make changes, if need be.
