Treasury yields have been on the climb as of late. The 10 year Treasury is up as much as 30 basis points since mid September, and that climb has many dividend investors worried as to the value of the stocks they hold. Most income investors see rising yields challenging the value of income stocks, causing them to fall, but in the 15 times in the post war era that the 10-year has risen 1.5% from its low, the S&P grew by 12% annualized in this stretch. What this current Treasury climb has in common with its predecessors is inflation. The latest PCE posted a 30-year record, and that is being priced into Treasuries, which is eroding the traditional income stream. With realized gains in Treasuries lower than the nominal yields driving headlines, dividend investors might not need to be worried about stock valuations sinking. 

FINSUM: If yields were being driven by growth factors, we might see the more traditional relationship between interest rates and asset prices, but an inflation-driven cycle might not push investors away from dividend equities.

The overall bond market is almost a bust this year but investors flocking for a yield can only go to one place, junk bonds. Lending conditions are very loose with all the accommodations both fiscal and monetary policy made this year, and those attempting to stream any income have to learn to high-yield debt. Inflation is eating up anything to be gained in treasuries. Investors are now treating high yield debt like a more liquid asset than ever purely because traditional bonds are losing to inflation. All of the policy measures have made many feel corporate debt is less risky than ever but the excess demand may be tipping, as even some of the riskiest debt is being sought after. Still high nominal economic growth is good for borrowers and reduces to investors.

FINSUM: Investors should be aware of interest rates pass-through from Fed tightening to corporate debt, strong inflation could lead to weaker pass through and even lower spreads than the market is already seeing.