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Prices of domestic REITs have slid recently, but with government bond yields on the rise, they aren't compelling in yield terms just yet.

This chart shows the yield pickup on the S&P/TSX REIT index over the five year government of Canada bond (REIT index yield minus five-year Canada yield) plotted against the performance of the REIT index.

What we're looking for is a yield differential where the price of REITs tends to rise. Over the past 36 months, that differential appears to have been set at approximately 4.2 per cent. When the yield on the REIT index is 420 basis points higher than five year Canada bonds, investor interest intensifies and the price of REITs begins to climb.

The S&P/TSX REIT index is 13.2 per cent lower than the 2013 highs in late April. The indicated yield on the benchmark has improved 1.1 per cent during this swoon.

The problem is that government bond yields have jumped almost exactly the same amount, and the spread has barely improved. In other words, the decline in REIT prices has not made them cheaper relative to bonds in terms of yield.

The spread between REITs and government bonds now stands at 3.87 per cent, slightly below levels where we'd expect a rally.

Investors should view the yield differentials as a rule of thumb – a 4.2 per cent spread is certainly not enough of a buy signal on its own. Still, the pattern is interesting and if we hit that level again, it's likely a good idea to start looking for investment opportunities in the sector.

Scott Barlow is a contributor to Globe Unlimited. Click here to read more of his work, and follow Scott on Twitter at @SBarlow_ROB.

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