6/28/07

More on PE and bond yields

Question. I guess you have to ask how the low bond yield squares with the ever accelerating commodity prices in USD, and the tight labour market.

Answer. Bond yields reflect all the variables you mentioned. They are interconnected and represent the same issue. Rising commodities, a weak dollar, rising wages, low productivity growth are all aspects of inflation.

The main determinant of yields is the inflation premium. Stable/low inflation implies stable/low yields. You can rest assured that PEs will decline as inflation rises (which is the most likely trend).

The historical relationship I discussed in a previous blog shows that below average yields are associated with above average PEs. I must add, for those more technically oriented, that the relationship between bond yields and PE is non-linear.

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

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