Investors love a round number. Just as market watchers have eagerly awaited each new 1,000-point milestone of the Dow, awarding special significance to 10,000, a bond yield of 6 percent turns heads. Just last October, the 30-year bond yield hit 5 percent as the Fed cut interest rates, hoping to save the global economy from a widespread currency crisis that decimated Asian markets and threatened U.S. financial markets. That, too, was dubbed a psychological barrier. The current climate could be a boon for bond buyers, said Don Hays, chief investment strategist at Wheat First Union.
Risk is a crucial factor to investors weighing whether to put their money in stocks or bonds.
Volatility anywhere in the economy, whether measured by political change, shifting economic policy, or major corporate news, can sway a stock investor toward more conservative investments like bonds. N.C. Orr said higher bond yields can appear especially alluring to investors in growth stocks, which include the pricey, often volatile technology companies. Those investments become less appealing once increased interest rates start chipping away at earnings. But some analysts say the current investment climate has room for both stocks and bonds. Co. Battipaglia said that if second-quarter earnings are as strong as anticipated, the equities market will bear up regardless of the Fed's decision on interest rates.