The Stock-Bond Yield Spread


Bryan Taylor, Chief Economist, Global Financial Data




               Global Financial Data has added a new indicator to the GFD Indices which will help researchers analyze trends in financial markets.  One of the indicators that many analysts use is the Equity-Risk Premium.  This measures the difference between returns on stocks and bonds or stocks and bills over time.  Generally speaking, stocks should provide a higher return than bonds because there is greater risk in holding stocks, as measured by the volatility of returns, than in holding bonds.  GFD provides analysis of these returns over holding periods of 5 years, 10 years and 20 years for all the major markets in the world.


Figure 1. United States Stock-Bond Equity Risk Premium, 1800 to 2023

               The equity-risk premium is illustrated in Figure 1 which shows the equity-risk premium between stocks and bonds in the United States during the past 225 years over periods of 10 years. During most of the past two centuries, the return on stocks has exceeded the return on bonds over 10-year periods.  The primary exceptions to that rule was the period before 1850 when the US market was dominated by finance companies, the 1870s following the Civil War, the 1940s when the government pushed bond yields down to help fund the war, and the 2008 Financial Crisis when stock returns collapsed. Primarily because of the losses that fixed-income investors have suffered during the past two years, the equity-bond premium is currently at its highest levels since the 1950s. As bonds continue to pay higher yields during the next few years, the ERP will decline.

               While the equity-risk premium looks at the difference in total returns between stocks and bonds, the stock-bond yield spread looks only at the difference in the yields on stocks and bonds and ignore any changes in the prices of stocks and bonds.  For people who are only looking at the yield on stocks and bonds, this is an important indicator.


Figure 2. United States Stock-Bond Yield Spread 1792 to 2023

               The Stock-Bond Yield spread in the United States since 1792 is illustrated in Figure 2.  Under normal circumstances, the yield on stocks should exceed the yield on bonds because stocks are riskier, have greater volatility, than bonds.  During most of the United States’s history, this has been true.  With the exception of a brief period during the War of 1812, the yield on stocks exceeded the yield on bonds from 1792 until 1957.  However, since 1957, rising bond yields and falling stock yields pushed bond yields above stock yields. Before the 1950s, most of the return to stocks came in the form of dividends, but since 1950, stocks have relied more on capital gains to provide returns to investors.  Consequently, bond yields have usually exceeded stock yields rather than vice versa. There have been brief periods recently where the stock yield exceeded the bond yield, mainly during periods where the Fed pushed bond yields down during the Great Financial Crisis in 2008 and during Covid, but with the recent increase in bond yields, bonds once again pay a higher return than stocks.

               Global Financial Data has calculated stock-bond yield spreads for over 60 countries.  These are available to all subscribers to the GFD Indices as are all of the indices for the equity-risk premium for stocks and bonds, for stocks and bills and for bonds and bills at 5-year, 10-year and 20-year intervals. The mnemonic formula to use to find the file for the stock-bond yield spread for any country is


So the code for the United States is GFSYIGUSAYM and the code for Canada is GFSYIGCANYM. The mnemonic for the equity-risk premium files are

GFER + ISO + years (5, 10, 20) + M for bonds and bills

GFER + ISO + years (5, 10, 20) + BM for stocks and bonds

GFER + ISO + years (5, 10, 20) + SM for stocks and bills

So the equity-risk premium for 10 years between stocks and bonds in the United States is GFERUSA10BM and the equity-risk premium for 20 years between stocks and bills in Canada is GFERCAN10SM. There are over 500 equity-risk premium indices that have been pre-calculated for subscribers to the GFD Indices.

               Both the equity-risk premium and the stock-bond yield spread are important indicators of financial markets that analysts use to understand trends in the market.  GFD provides over 500 of these indicators from countries across the world to its subscribers with more history than is available anywhere else.  If you are interested in any of these indices, please feel free to contact us.

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