NEW YORK (AP) — As bond yields plunge to record lows and investors look for income, they're pouring money into stocks, sending the market to its own record highs.
Once upon a time, if you were an investor who wanted a steady stream of income, you would probably think of U.S. Treasury bonds. Backed by the solid credit of the U.S. government, those bonds were considered ultra-dependable forms of income that wouldn't lose value.
You couldn't count on stocks to pay you a return like that. The dividends stocks paid were usually smaller, and you also ran the risk of losing some of your investment if the stock price declined.
Now that stocks, broadly speaking, actually pay more than many bonds do, investors' thinking has changed.
"Stocks have become the new bonds," says Jack Ablin, chief investment officer at BMO Private Bank. "Income investors have opted to invest in equities versus lower-yielding bonds."
The drop in bond yields has been dramatic. At the start of 2014 the yield on the 10-year Treasury note was 3 percent, and a decade ago it was twice that much. Now it's around 1.6 percent.
The dividend yield on S&P 500 stocks, meanwhile, hasn't changed much over the last few years. It's around 2.1 percent, far more than what the 10-year Treasury pays.
There are several factors behind the plunge in bond yields. Investors have tended to buy bonds when they feel jittery or when they anticipate the U.S. economy is slowing down, but these days they also are driven to buy bonds when they feel the alternatives are worse, or if they're worried about disruptions in the global economy. When demand for bonds increases, it sends yields lower.
Investors have flocked to Treasury bonds as they worried about everything from the U.S. economy to a slowdown in China to Britain's recent vote to leave the European Union. And central banks including the Fed have bought bonds in recent years in an effort to stimulate the economy by keeping long-term interest rates low.
There are many other markets for bonds, but the U.S. government is considered the gold standard because of the country's rock-solid credit.
If you think yields are low here, just look at other countries. The yield on the United Kingdom's 10-year note is about 0.8 percent, France's is 0.2 percent, and in Japan and Germany, those yields are negative, which means investors actually pay for the privilege of continuing to own them.
"We've got a much higher yield," says Scott Wren, global equity strategist for Wells Fargo's Investment Institute. "That attracts money."
That difference means it may be a long time before yields on U.S. government bonds go much higher. Faced with poor prospects for income from bonds, investors have poured money into stocks, especially those that pay high dividends and appear less likely to lose value in a downturn.
The stocks that pay the largest dividends are phone companies and utilities, and investors have clamored for them all year. The prices of S&P 500 phone and utility companies have soared about 20 percent in 2016, far more than the rest of the market. Even with those gains, phone companies still pay a dividend yield of 4.3 percent and utility companies pay 3.3 percent, still way more than the 10-year Treasury note.
There have been other periods where stocks had bigger yields than bonds. Often, it meant stocks had dropped sharply in value, such as the financial crisis of 2008-2009 or the European debt crisis of 2012. This time is different: the quest for income has helped push stocks to all-time highs, and high demand may keep them there.
That's also partly because large companies in the U.S. look pretty good compared to the markets of Europe and Japan, where growth is sluggish or nonexistent, or China, where economic growth is slowing down.
All the while, the U.S. economy has steadily churned along. Despite a lot of nervousness from investors, it hasn't run out of steam yet.
"The growth we have in the U.S. might be modest or slow, but it's pretty dependable," Wren says. "Generally we have better economic growth than these other developed countries."
That said, it would likely take a lot more growth in the U.S. than we have now, as well as the usual side effect of growth, inflation, to get bond yields much higher than they are.
Ablin, of BMO, said it may be some time before investors go back to thinking of bonds in the same way they used to.
"Yields would have to rise appreciably to make bonds more competitive with dividend yields," Ablin said.
AP Markets Writer Marley Jay can be reached at http://twitter.com/MarleyJayAP . His work can be found at http://bigstory.ap.org/journalist/marley-jay