If It’s Not One Thing, It’s Another

Head of Fixed Income Strategy
Follow Kevin Flanagan
Chief Investment Officer, Model Portfolios

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“Well, Jane, it just goes to show you, it’s always something—you never can tell. If it’s not one thing, it’s another.”

(“Roseanne Roseannadanna,” played by Gilda Radner, Saturday Night Live, 1977–1980)

The Evolution of Rates, Spreads and Yields

Let’s begin this blog post with a graph we used in a blog post from last June, highlighting the historical disparity between the S&P 500 Index dividend yield and the 10-Year Treasury note yield

At that time, we made the argument that investors seeking to optimize current income out of their portfolios were better off over-allocating to yield-focused equities than to traditional bond investments.

Well, what a difference eight months make:

Figure 2_SP 500 dividend and UST yield

The U.S. yield curve steepened dramatically over the past several months, driven by expectations for an improving economy, massive fiscal stimulus and a continuation of accommodative monetary policy

To provide some perspective, the rise in the UST 10-Year yield began early last August when the all-time low watermark of 0.51% registered on August 4. Since that date, the rate increase has been an eye-opening 120 basis points (bps) through March 18.1 However, the development getting the lion’s share of attention is what has transpired so far this year, where the rise has been a whopping 78 bps. 

Figure 3_10 and 2 yr Treasury

At the same time, U.S. credit spreads have narrowed and come all the way back to reside at pre-pandemic levels. In fact, both investment-grade and high-yield are hovering near lows not seen since 2018.

Figure 4_US adjusted spread

The result is that, for the first time in a long time, investors can now generate current income out of their bond portfolios that is higher than what they can get from their equity portfolios:

Figure 5_Equity Portfolio Yields

Portfolio Implications

From a portfolio perspective and using the yield information above, let’s begin with a comparison of the current income available from a traditional stock and bond portfolio and the WisdomTree Model Portfolios that are designed explicitly to optimize risk-adjusted current income, specifically the Global Dividend model, the Global Multi-Asset Income model and the Siegel-WisdomTree Longevity model:


Despite the higher current income available from bond allocations, we view the total return risk to be much higher in the bond market. In our base case outlook, we believe rates will continue to grind higher, resulting in a further steepening of the yield curve. Credit spreads could also continue to tighten, but the runway from present levels is a shrinking one. 

From a portfolio perspective, we continue to recommend that investors seeking to optimize risk-adjusted current income continue to focus on their equity allocations because, well, “you never can tell.”



1Source: Ycharts, as of March 18, 2020.

Important Risks Related to this Article

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For more investing insights, check out our Economic & Market Outlook


About the Contributors
Head of Fixed Income Strategy
Follow Kevin Flanagan
As part of WisdomTree’s Investment Strategy group, Kevin serves as Head of Fixed Income Strategy. In this role, he contributes to the asset allocation team, writes fixed income-related content and travels with the sales team, conducting client-facing meetings and providing expertise on WisdomTree’s existing and future bond ETFs. In addition, Kevin works closely with the fixed income team. Prior to joining WisdomTree, Kevin spent 30 years at Morgan Stanley, where he was Managing Director and Chief Fixed Income Strategist for Wealth Management. He was responsible for tactical and strategic recommendations and created asset allocation models for fixed income securities. He was a contributor to the Morgan Stanley Wealth Management Global Investment Committee, primary author of Morgan Stanley Wealth Management’s monthly and weekly fixed income publications, and collaborated with the firm’s Research and Consulting Group Divisions to build ETF and fund manager asset allocation models. Kevin has an MBA from Pace University’s Lubin Graduate School of Business, and a B.S in Finance from Fairfield University.
Chief Investment Officer, Model Portfolios
Scott Welch is the Chief Investment Officer of Model Portfolios at WisdomTree, a provider of factor-based ETFs, differentiated model portfolios, and digital asset solutions. In his role as CIO, he oversees the construction and ongoing management of the WisdomTree model portfolio solution set. He chairs the WisdomTree Model Portfolio Investment Committee and is an active member of the WisdomTree Asset Allocation team. Prior to joining WisdomTree, Scott was the Chief Investment Officer of Dynasty Financial Partners, a provider of outsourced investment research, portfolio management, technology, and practice management solutions to RIAs and advisory teams making the move to independence. Prior to Dynasty, Scott was a Co-Founder and the Chief Investment Officer of Fortigent, LLC, a provider of outsourced investment research, technology, and practice management solutions to RIAs and banks that targeted high net worth investors. Scott holds the Certified Investment Management Analyst (CIMA®) designation, and he sits on the Board of Directors of the Investments & Wealth Institute (IWI, formerly known as IMCA) and is an outside member of several RIA Investment Committees. Scott earned a Bachelor of Science in Mathematics from the University of California at Irvine and an MBA with a concentration in Finance from the University of Massachusetts at Amherst.