Gillian Tett: The real conundrum is bond and equity yields.

For decades, business school students have been taught that equity yields are supposed to be higher than those for bonds, to compensate investors for risks with corporate earnings and market cycles.  

But “today, that relationship looks very different”, Smith says: the S&P 500 earnings yield was around 3.6 per cent in early June, around 0.85 per cent below the 10-year Treasury yield. Financial logic has been turned upside down.

One possible explanation is that bonds are mispriced.

A second possibility is that it is actually equities which are mispriced. This seems more likely. 

Worse, there could be investor indigestion soon with all the looming IPOs.

I fear that there is a third explanation for this conundrum: investors are so dazed and confused that valuation models are breaking down.

After all, most corporate and financial professionals grew up in a world where neoliberal economics, globalisation and Pax Americana were their definition of “normality”.

After all, Stein made his quip four long decades ago, but debt has continued to expand. And in the equity world, the dotcom bubble lasted longer than anyone expected.

Gillian Tett Financial Times 12 June 2026

https://www.ft.com/content/4389caaa-b87a-4d4c-82a1-db161d3265d3?syn-25a6b1a6=1

“If something cannot go on forever, it will stop.” So said Herb Stein, former chair of the US Council of Economic Advisers, back in 1986, about American debt.

https://babel.hathitrust.org/cgi/pt?id=umn.319510030778307&view=1up&seq=270

For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum.

Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience."

Alan Greenspan, before Congress, February 16, 2005

https://www.internetional.se/conundrum.html

Mr Debelle – a top official at Australia’s central bank – predicted that markets were heading for wild volatility, since investors were naive about structural risks. A “sizeable” number of them, he observed, probably presumed that they could exit their positions before any sell-off.

“History tells us that this is generally not a successful strategy,” he warned. “The exits tend to get jammed unexpectedly and rapidly.”

Gillian Tett, FT October 16, 2014

https://www.internetional.se/minskybank.htm