One of the traditional responses to the recent bond rout is that at some point yields should become attractive enough to prompt a rotation out of stocks and back into bonds. A quick comparison between the 10Y Treasury yield and the yield on S&P dividends shows just how much more attractive bonds have become for yield-starved investors.

And yet, asset allocation is a dynamic process, and as such, there is probably no “magic” number which triggers a great un-rotation from stocks back into bonds. However, in an attempt to get an approximation of said number, Bank of America tested a few frameworks to determine the 10-yr yield breakpoint at which bonds look more attractive than stocks, and they all spit out the same number: 5%.

According to BofA’s Savita Subramanian, 5% is the level of the 10-yr Treasury bond yield at which Wall Street’s average allocations to stocks peaked, and then started to wane (as yields rise higher) according to the bank’s Sell Side Indicator.

5% is also the level of the 10-yr at which the market-derived equity risk premium framework indicates that stocks trade at fair value to bonds, all else equal (in other words, at current levels, stocks still appear inexpensive relative to bonds).

5% on the 10-yr is the level at which the reward to risk ratio for stocks vs. bonds skews more favorably toward bonds. Specifically, a 5% 10yr Treasury yield is the level at which the Information Ratio for stocks versus bonds has skewed more favorably toward bonds. (The information ratio is calculated as the median of the 12-month S&P 500 price returns divided by the standard deviation of returns within different yield periods using monthly forward 12-month data for returns).

Most importantly, 5% is the expected return of the S&P 500 over the next decade, based on BofA’s valuation framework (which has explained 80%+ of stock returns in prior decades). According to Subramanian, based on a historical regression, using today’s price to normalized earnings ratio yields an expected annual price return of 5% for the S&P 500 over the next 10 years. If the 10yr Treasury, the so-called “risk-free” rate, climbs to the level of expected equity returns, the decision between stocks and bonds would be easy, as it becomes a question of “Risk-free” 5% vs. risky 5%.