As people move money from stocks to US treasuries or other bonds, the yield on stocks goes down, while the yield on bonds goes up. At some point, the discrepency becomes too great and the arbitrageur steps in to make money on the difference by reversing the flow, selling bonds to buy stocks.
We are close to that point for Ford/F (20 cent annual dividend) and 10-year US Treasuries (today, yielding a bit under 1.6%). There is a formula for calculating what the arbitraguer expects to make by moving money from these treasuries back into F. To do an easy variation for Ford, remember that a 20 cent dividend meant that Ford yielded 2% back when it was at $10. You can adjust those 2 numbers as follows, using treasury interest rates.
First step-- note Treasury yield is falling--
^TNX, almost 1.9% back in Sept.
^TNX, under 1.6% today, Nov 15
Second step- adjust F to see it's worth to an arbitrageuer:
Sept., $10.50ish = 10 TIMES 2%/1.9%ish
Today, $12.50ish = 10 TIMES 2%/1.6%ish
Third step-- interpret the numbers:
Back in Sept, treasury rates had risen to 1.9% (some people felt safer with stocks and stopped putting money into bonds). For example, some bond arbitrageurs said to themselves, "F is over $10.50, so I will not buy as much F each month now. Maybe I will wait until F falls to $10.50, then I will start buying F again in full force." Result: Arbitrageur quits buying F (F goes sideways if this is common), may even sell some to buy more bonds (F goes down if this is common).
Today, seeing F's price drop below $11, that same atrbitrageur would say, "Hmmm, maybe I don't need to wait until $10.50. I can already get a better yield on F than from these Treasuries. That will be true until F reaches $12.50." Result: Arbitrageur switches from buying bonds to buying F (bonds go sideways if this is common), may even sell some bonds to buy more F (bonds go down if this is common).
JB wrote [As people move money from stocks to US treasuries or other bonds, the yield on stocks goes down . . . . ]
If people are moving money out of a stock, shouldn't the PRICE go down and the YIELD go up.
you're exactly right gruck. Meant to say PRICE goes up on whatever is bought in large amounts, down on whatever is sold in large amounts. After such a price change, dividend or interest yields will go in the opposite direction, so opposite of what I said of what I said. (I sometimes reverse what I'm thinking when i'm typing, due to thinking about 2 things at once, this time, price vs. yield. Have not been able to train myself out of it. Sorry!! )
Formulas are good. Bond arbitrageurs will see F in a good light between $10.50 and $12.50. They may sell as it reaches $12.50, being interested in capital gains, not the yield,. People seeking yield long-term and future growth potential in yield, however, will buy both then and beyond $12.50, as the growth appears, is confirmed.
JB, Shaggy's mom