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Yield Gap

The yield gap is the difference between the yields on two different types of assets, typically between government bonds and equities (stocks). It helps investors compare the return potential of safer, fixed-income securities like government bonds versus riskier assets like stocks.A widening yield gap indicates that stock yields are becoming more attractive relative to bond yields, while a narrowing yield gap suggests the opposite, with bonds offering more competitive returns.

Example

If the dividend yield on stocks is 4% and the yield on 10-year government bonds is 2%, the yield gap is 2%, indicating that stocks may offer better returns relative to bonds.

Key points

• The difference between the yields on two different asset classes, commonly between stocks and government bonds.

• Helps investors assess the relative attractiveness of riskier assets (stocks) versus safer assets (bonds).

• A widening yield gap suggests higher stock returns relative to bond yields, while a narrowing gap indicates bonds are more competitive.

Quick Answers to Curious Questions

The yield gap allows investors to assess whether stocks offer better returns than bonds, guiding asset allocation decisions based on relative yield attractiveness.

A widening yield gap suggests that stocks are offering more attractive returns relative to bonds, which could influence investors to favor equities over fixed-income securities.

It helps investors evaluate the trade-off between the higher potential returns of stocks and the relative safety of bonds, especially during volatile or uncertain economic conditions.