The 10-year Treasury yield is currently 2.50%, while the S&P’s dividend yield at 1.93%.(Source: multpl.com)The 10-year yield is more volatile than the dividend yield on the S&P. The 10-year is dictated by market forces – though recently with plenty of central bank intervention due to quantitative easing programs depressing yields. The S&P 500 dividend yield, on the other hand, is discretionary, dependent on management decisions and usually consistently hovers around 2%. During the market meltdown in 2008 and 2009, the S&P’s dividend yield reached 4% purely as a consequence of rapidly falling share prices. When rates increase, management teams may be incentivized to increase dividends in order to maintain investor interest and keep a lid on fund outflows. With the 10-year offering a better yield than the S&P’s dividend yield – to go along with general overvaluation of stocks – this is expected to push more investors into US Treasuries. This will likely keep stocks and bonds in some type of equilibrium. With stocks at sub-4% expected forward real returns, 10-year yields going up to 2.7%-2.8% will likely cause some level of correction in the stock market on a flow of funds basis. At some point, the risk-reward doesn’t become favorable. This is why I believe a 10-year yield above 2.8% is unlikely in the next six or more months. If yields do increase beyond 2.8%, I would expect a dip in stocks as more investors find bond prices more palatable. The main exception, of course, is if earnings growth improves to a level to better support stocks on a fundamental basis. The market is currently pricing in low double-digit percentage earnings growth (on a year-over-year basis) over the next five years.