30-Year TIPS Yield 3.35% as Equity Premium Shrinks

Jeremy Siegel observed that 30-year Treasury Inflation-Protected Securities are now delivering real returns of about 3.35%, a level not matched in decades. This yield is undercutting the rationale for owning equities.

Siegel, a Wharton School finance professor and chief economist at WisdomTree, said that stocks continue to outperform bonds. However, the buffer is diminishing as Treasury yields reach levels last witnessed in 2002.

Does the Stock Premium Over Bonds Still Exist?

During a CNBC interview, Siegel pointed to TIPS, which provide a fixed yield above inflation. He stated that the 30-year version hasn't yielded this much in 20 to 30 years.

According to his calculations, the stock market trading at 20 times earnings returns roughly 5% above inflation. This leaves around 1.65 percentage points as compensation for equity risk, a gap he said is narrowing.

Meanwhile, the 10-year Treasury yield touched 5.33% on Thursday, according to Bloomberg.

Why Does Big Tech Ignore Higher Rates?

Siegel said the Magnificent 7—the seven mega-cap tech stocks—enjoy profit margins of 50% to 70%. In comparison, companies outside tech earn margins of 7% to 10%.

As a result, higher borrowing costs eat into those thinner profits more significantly. Siegel noted that this has halted the rotation into broader equities that occurred in the first half of the year.

The stress is visible: about 75% of S&P 500 stocks fell in September even as the index edged higher.

Siegel, who called for a September rate hike, also believes the Fed needs two more increases this year. The central bank's own projections anticipate only one.

Siegel suggested that Fed Chair Kevin Warsh could steer his colleagues to skip October and instead raise rates by half a point in December. The October meeting falls six days before the midterm elections.

Still, Fed Vice Chair Philip Jefferson said Thursday that colleagues may need additional time to assess the next move.

Robert Kaplan, a Goldman Sachs vice chairman and former Dallas Fed president, says traders are already demanding a Warsh premium. That extra yield reflects uncertainty about the Fed chair. If real yields persist near 3%, stocks may require stronger earnings to justify current valuations.