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The 5% zone

We’re reaching the 5% zone. The chart below shows 3 month cash rate, IG bonds yield and S&P500 earnings yield (inverse of P/E). The interesting part though, is that there is no risk premium. Cash offers same yield as risky assets. There seems to be a miss pricing of risk because we’re at a transition point: corporate spreads need to widen and equity prices need to fall to offer compensation to investors for the uncertainty. Or, Fed funds need to fall, and cash rates will follow, to allow risky assets to look attractive. Difficult to see this chart remaining like this for long.

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Source: Pictet Asset Management

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