- Summary:
- The yield on the US 2-year bond currently stands at 3.95%. While the yield on the German 2-year bond is at 2.63%. This means that US bonds pay 50% more than the same bonds in Europe.
Something unusual has been happening in recent months in Western stock markets.
Equity performance in Europe has been excellent over the past few months, outperforming US equities.
Given the current variables, the situation may seem incomprehensible. Europe’s inflation rate is still above that of the US, which should be interpreted to mean that monetary policy in Europe will be tighter than in the US in the coming months, but why do European stocks continue to outperform US stocks?
Reasons for the advantage of European equities over US equities.
A first answer could be the fact that the Federal Reserve initiated the rate hike before the European Central Bank, and therefore the effects are still being felt in the market.
But beyond that, there are two decisive factors that can make a fundamental difference.
The first of these is the yield on US versus European debt. The yield on the US 2-year bond currently stands at 3.95%. While the yield on the German 2-year bond is at 2.63%. This means that US bonds pay 50% more than the same bonds in Europe.
The conclusion from this data is that fixed income pays better in the US than in Europe, and therefore there is more incentive to stay in bonds than in equities in the US.
On the other hand, the dividend payout of European companies far exceeds the dividend payout of US companies, bearing in mind that most European investors are conservative, and seek to be invested in large companies with strong dividends.
In this way, we can perhaps better understand these differences between the stock markets on one side of the Atlantic and the other.