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Dear Sir,
This is the definition of reverse yield gap..
“An excess of returns on gilt-edged securities above those on equities. This is likely to occur during periods of high inflation because equities are expected to provide capital gains to compensate for inflation while gilt-edged securities are not. During periods of stable prices the yield gap is usually positive: a greater yield on equities is needed to compensate investors for their relative riskiness”I didn’t understand the high inflation part. It says equities are expected to provide capital gains where gilt edged securities are not. Doesn’t this mean equity will have more return than gilt edged? (which is not the case in reverse yield gap)
Please help me understand this clearly.
Thank you in advance.
Regards,
Rajvir Singh Oberai.In order for the company to increase the value of the equity they need to expand the company and they do this by the reinvestment of dividends. The greater the retention of earnings, the less is paid out as dividend, and therefore the dividend yield will be lower. The reverse yield gap is referring to the dividend yield being lower than the interest yield on govt securities.
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