30-Year Treasury Bonds Offer 3.35% Real Returns, Squeezing Stock Appeal

30-year inflation-protected Treasury bonds now deliver real returns of about 3.35%, the highest in decades, according to Jeremy Siegel, Wharton School finance professor and WisdomTree chief economist. While Siegel asserts that stocks still outperform bonds, the margin is narrowing as Treasury yields reach levels last seen in 2002. The 10-year Treasury yield recently hit 5.33%. Siegel highlighted Treasury Inflation-Protected Securities (TIPS), which provide fixed returns above inflation, noting that the 30-year version has not yielded this much in 20 to 30 years. He calculated that a market valued at 20 times earnings yields about 5% above inflation, leaving only 1.65 percentage points of reward for stock risk. Siegel pointed out that the Magnificent 7 tech stocks enjoy profit margins of 50% to 70%, while non-tech companies earn only 7% to 10%. This disparity means higher borrowing costs significantly impact non-tech profits. In September, about 75% of stocks in the S&P 500 declined, despite the index's slight increase. Siegel advocates for two more Fed rate hikes this year, suggesting a potential half-point increase in December. Fed Vice Chair Philip Jefferson indicated that more time may be needed to assess future moves. Goldman Sachs vice chairman Robert Kaplan noted that traders are already factoring in uncertainty regarding the Fed chair.

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