Ahh, thank you. That helps a lot. I suppose it's interesting that the return from companies is even remotely comparable to the return from bonds. That's probably a dumb realization but I don't know much about this stuff.

Not dumb, this stuff isn't really taught unless you explicitly pursue it.

One note: the return on some companies may be higher and others lower, the issue is that the risk for money in companies is higher.

Very simplistic example: the US government can offer you a flat 5%, a company investment offers 10% half the time, 0% the other half.

One is a sure thing, one is a gamble. The more the 'gamble' the more risk and that is a driving factor in investments. People are willing to take huge risks if the payoff is very large (Look at Michael Burry and the big short)

You can roughly calculate yield from a stock investment. If a stock has a P/E ratio of 20 (i.e. the value of all stocks issued is 20x its annual earnings), divide 72/20 to get a yield of 3.6%. If US government bonds offer 1% yield this stock looks like a deal, but when safer government bonds yield 4% this stock now looks unattractive.

Of course this is a gross oversimplification: earnings can grow, stocks can pay dividends, companies can go bankrupt, and companies have to pay their own bondholders as well as stockholders. But hopefully it shows that a tradeoff between stocks and bonds does exist.

Bonds are much less risky too. So when interest rates were low, it made sense for investors to put money into companies because with bonds you got a tiny return guaranteed vs a high risk but potentially large payoff.

Now, bonds are guaranteeing a 5%+ return, so a non-profitable business is much less attractive as a proposition.

Actually, the Fed sets the Federal Funds Rate, which is the rate at which commercial banks borrow and lend their extra reserves to one another overnight. Increasing the Federal Funds Rate increases borrowing costs across the board, which subsequently will tend to decrease the money supply.

I believe that U.S. bonds are priced at the market.

It's not all about rich people switching their portfolios around. When rates rise, operating expenses for companies go up, and so they pass that cost down. This is a bigger deal for companies perennially in debt than startups.

This is a good explanation, but the real, inflation-adjusted bond yield is still negative.

Is it? The 12-month inflation rate for May 2023 was 4% and the federal funds rate is 5%.

Remember that the move away from VC started over a year ago, but... Once you factor in corporate taxes, you're still at 0%.