Will juicy bond yields dent the allure of stocks?

After the sharp rise in global bond yields to, in many cases, their highest levels in more than a decade, PIMCO is out with a research note hymning the virtues of fixed income in investment portfolios.

As the world's biggest bond investor, there's an element of 'they would say that, wouldn't they'. But the data is quite striking and the argument as a whole could put pressure on equity markets if investors heed the advice.

After two decades trailing equity earnings yields - effectively the profit generated per dollar of share price - U.S. aggregate bond yields are now once more on a par at around 5%, says PIMCO's multi-asset credit strategist Lotfi Karoui.

On top of that, Karoui says, high yields mean bond investors are cushioned from future falls in bond prices as they are generating much better income - and have more to gain if growth slows and yields fall. That's a very different situation from 2022, he says, when yields shot up from ultra-low levels and bonds went splat.

Karoui says investors still heavily favour stocks thanks to the huge rallies we've seen in recent years and the experience of 2022, but recommends they shift to a more balanced position.

"The case for owning bonds today isn't that they'll outperform equities – it's that they can once again deliver meaningful income potential and real downside mitigation," he says.

Stocks have struggled in recent weeks as yields have shot higher. Should markets take PIMCO's advice, there could be further ructions yet.