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Lousy Risk Premiums

|Includes: DIA, LQD, QQQ, SPY, iShares 20+ Year Treasury Bond ETF (TLT)

Lousy Risk Premiums

November 25, 2009

As the stocks and bonds rallied, and treasuries corrected (see graphs below), the risk premiums for stocks and bonds over the treasuries have come down.  Currently, long term treasuries are yielding around 4%, which is not a great return by itself -- especially considering the future inflation risk.  However, the incremental yield one can get from high quality corporate bonds is not much -- around 1.3%.  Based on expected earnings of around $70-$75 for S&P500 in 2010, the earnings yield of S&P500 is around 6% -- giving a risk premium of around 2% over treasuries. 

These risk premiums seem to be too low considering that the economy is still on life support from the government and US consumers may have a tough time maintaining the high spending levels of the past. 

TLT

Long Term Treasuries ETF

Current Yield: 4%

 

LQD

Corporate Bond ETF

Current Yield: 5.3%

 iShares iBoxx $ Invest Grade Corp Bond (NYSEARCA:<a href='https://seekingalpha.com/symbol/LQD' title='iShares iBoxx $ Investment Grade Corporate Bond ETF'>LQD</a>)

SPY

S&P500 ETF

Dividend Yield: 2.2%

2010 Earnings Yield: 6%

 SPDRs (NYSEARCA:<a href='https://seekingalpha.com/symbol/SPY' title='SPDR S&P 500 Trust ETF'>SPY</a>)

 

Disclosure: Long TLT, Short SPY