Jeremy Siegel says 30-year inflation-protected Treasury bonds now deliver real returns of about 3.35%, a level not seen in decades. That yield is squeezing the case for owning stocks.

Siegel, Wharton School finance professor and chief economist at asset manager WisdomTree, said that stocks still beat bonds. However, that cushion is shrinking as Treasury yields hit levels last seen in 2002.

Do Stocks Still Beat Bonds on Real Returns?

During his CNBC interview, Siegel pointed to Treasury Inflation-Protected Securities (TIPS), which pay a fixed return above inflation. He said the 30-year version has not yielded this much in 20 to 30 years.

By his math, a market valued at 20 times earnings returns about 5% above inflation. That leaves roughly 1.65 percentage points of reward for taking stock risk, a gap he said is shrinking.

Meanwhile, the 10-year Treasury yield touched 5.33% on Thursday, according to Bloomberg.

Why Is Big Tech Shrugging Off Higher Rates?

Siegel said the Magnificent 7, the seven mega-cap stocks led by tech, earn profit margins of 50% to 70%. In contrast, companies outside tech earn 7% to 10%.

Higher borrowing costs therefore take a bigger share of those thinner profits. Siegel said that has stalled the rotation into broader stocks seen in the first half.

The strain shows, since about 75% of stocks fell in the S&P 500 in September while the index edged higher.

Siegel, who urged a September hike, also said the Fed needs two more increases this year. The central bank’s own projections point to one more.

Siegel suggested Fed Chair Kevin Warsh could steer colleagues to skip October and hike a half point in December. The October meeting falls six days before the midterm elections.

Still, Fed Vice Chair Philip Jefferson said Thursday that colleagues may need more time to judge the next move.

Robert Kaplan, a Goldman Sachs vice chairman and former Dallas Fed president, says traders already demand a Warsh premium. That extra yield reflects uncertainty over the Fed chair. If real yields hold near 3%, stocks may need stronger earnings to justify current valuations.

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