Daily study of economics, management, and finance

Prepared as of: 2026-10-2, 7:04 AM (KST)
2026-10-2 (KST) · Day 12 · Economics and Markets
Today’s topic: Why can rising US 10-year yields hurt growth stocks more? — Connecting bond yields, discount rates and share prices

1. Review of the previous lesson

In Day 11, we adjusted DCF-derived EV for net debt, non-controlling interests and other items, then divided by fully diluted shares to calculate value per share. Today, we explore how US Treasury yields—a major market variable affecting that discount rate—connect to share prices.

2. Today's key concept

Today’s market question

The US 10-year Treasury yield has risen from 4% to 5%. Must you sell growth stocks?

To state the conclusion first, this is Not necessarily.

First, check these four things.

1. Why did yields rise?
   Check whether growth expectations improved, inflation concerns increased, or the term premium rose.

2. When does the company generate cash flow?
   The more it depends on distant future earnings rather than current earnings, the more sensitive it is to rising rates.

3. Does the company have substantial debt or substantial cash?
   A heavily indebted company may face higher interest costs, while a net-cash company may earn higher returns on deposits and bonds.

4. Can earnings growth offset rising rates?
   If rates rose because the economy improved and earnings forecasts increased by more, share prices could also rise.

The key sequence is:

\[ \text{Treasury yield}\uparrow\rightarrow\text{Discount rate}\uparrow\rightarrow\text{Present value of future cash flows}\downarrow \]

Growth stocks whose cash generation is concentrated in the distant future tend to be affected more by higher discount rates than mature companies generating substantial cash in the near term.

3. Concept explained

3-1. First, decide which of two companies is more sensitive to rates

The following are two hypothetical companies.

When rates rise, Company B’s value will generally decline more.

Much of Company A’s value consists of cash to be received soon, while Company B’s value depends heavily on distant future cash that has not yet materialized.

This is why growth stocks are often described as long-duration assets in the equity market in discussions of valuation.

3-2. Why are interest rates a discount rate for future money?

If investors can earn 5% annually on very low-risk US Treasuries, they will demand a higher expected return from risky equities.

A simplified way to think about the required equity return is as follows.

\[ \text{Required equity return} \approx \text{Risk-free rate}+\text{Equity risk premium} \]

For example, suppose investors require the following.

• US Treasury yield: 4%
• Equity risk premium: 5%

\[ \text{Required equity return} \approx 4\%+5\% = 9\% \]

If the Treasury yield rises to 5% and the risk premium stays unchanged, the result is as follows.

\[ \text{Required equity return} \approx 5\%+5\% = 10\% \]

If the required return rises from 9% to 10%, the same future cash flows are discounted at a higher rate, reducing their present value.

The actual cost of equity can be estimated as follows using CAPM, covered in Day 9.

\[ R_e=R_f+\beta\times ERP \]

Rising Treasury yields may therefore increase both the cost of equity and WACC.

3-3. The US 10-year Treasury yield differs from the Fed’s policy rate

The Fed directly sets a target range for the federal funds rate, a very short-term rate. The US 10-year yield, in contrast, is determined by the market.

The US 10-year yield is broadly influenced by the following factors.

• The expected future path of the Fed’s short-term rates
• Long-term growth expectations
• Expected inflation
• Treasury supply and demand
• Fiscal deficits and Treasury issuance
• Central bank quantitative easing and tightening
• The term premium investors demand for holding long-term bonds
• Demand for safe assets

Conceptually, it can be viewed as follows.

\[ \text{10-year yield}\approx\text{Average expected future short-term rates}+\text{Term premium} \]

The 10-year yield can therefore rise even if the Fed holds its policy rate unchanged.

For example, long-term yields may rise when markets expect the following.

• Inflation persists longer than expected
• A strong US economy keeps rates higher for longer
• Fiscal deficits increase Treasury issuance
• Investors demand more compensation for holding long-term bonds

Conversely, even before the Fed cuts its policy rate, greater recession risk can cause the 10-year yield to fall as markets anticipate future rate cuts.

3-4. Why do bond prices fall when yields rise?

Suppose an existing bond pays 3% annual interest, while a newly issued similar bond pays 5%.

At the same price, investors would not buy the existing 3% bond. Its price must fall to make it competitive.

Market rates rise → existing bond prices fall

Market rates fall → existing bond prices rise

This relationship is the most basic principle of the bond market.

Interest rates matter beyond bonds. Treasuries serve as a benchmark for required returns on other assets, so they also affect equities, real estate and corporate bond values.

3-5. Why can growth stocks behave like long-term bonds?

For bonds, principal and interest received further in the future are more sensitive to rate changes. Duration is the concept used to measure this sensitivity.

The exact same formula does not apply to equities, but the intuition is similar.

Value stocks / mature companies

• Substantial current revenue and earnings
• Substantial current FCF
• A large part of enterprise value comes from near-term cash flows
• Relatively short equity duration

High-growth companies

• Current FCF is small or negative
• Future market share and margin expansion are important
• A large part of enterprise value comes from cash flows in the distant future
• Relatively long equity duration

Rising rates reduce the present value of distant cash flows more sharply, so, all else equal, high-growth companies face greater valuation pressure.

The following companies may be particularly sensitive to rates.

• Companies currently making losses but expected to become profitable in the distant future
• Companies with very high P/E or revenue multiples
• Companies whose major CapEx occurs upfront while FCF arrives later
• Companies with a very high share of value in Terminal Value
• Companies whose share price is explained largely by long-term growth expectations

3-6. Not all growth stocks are equally sensitive to rates

Even technology stocks differ substantially.

Growth companies such as NVIDIA, Microsoft and Alphabet already generate substantial earnings and cash. They should not be analyzed in the same way as early-stage growth companies whose revenue is rising quickly but which have not yet generated sustainable FCF.

Look beyond the “growth stock” label to the following questions.

• Is there current FCF?
• How many years until future FCF materializes?
• Can the company fund its investment internally?
• Are additional equity raises or borrowings needed?
• Can high margins and ROIC be sustained?

3-7. Share-price reactions depend on why rates rose

More than the rise in rates itself, the reason for the rise is what matters.

Case 1: rates rise because growth is strong

\[ \text{Growth expectations}\uparrow \rightarrow \text{Corporate revenue and earnings outlook}\uparrow \]

At the same time,

\[ \text{Interest rate}\uparrow \rightarrow \text{Discount rate}\uparrow \]

Share prices can rise if the benefit of improved cash flows exceeds the effect of a higher discount rate.

Cyclicals, banks, industrials and some semiconductor stocks may rise alongside rates when expectations for the economy improve.

Case 2: rates rise because of inflation concerns

\[ \text{Inflation concerns}\uparrow \rightarrow \text{Rate-cut expectations recede} \rightarrow \text{Discount rate}\uparrow \]

Margins may also deteriorate if companies cannot pass higher costs through to prices.

\[ \text{Costs}\uparrow \rightarrow \text{Margin}\downarrow \]

In this case, both cash flows and discount rates can work against share prices.

Case 3: rates rise because of the term premium or Treasury supply

Yields may rise because the government issues more Treasuries or demand for long-term bonds declines. In this case, the discount rate can rise without any change in near-term corporate earnings, pressuring equity valuations.

Case 4: yields on risky assets rise because of credit concerns

Even if Treasury yields decline, a sharp increase in corporate credit spreads can raise a company’s actual funding cost.

\[ \text{Corporate bond yield} = \text{Treasury yield}+\text{Credit spread} \]

Treasury yields alone therefore cannot establish corporate financing conditions.

3-8. Real yields are often more important than nominal yields

Nominal Treasury yields can be thought of as roughly comprising real yields and expected inflation.

\[ \text{Nominal yield} \approx \text{Real yield}+\text{Expected inflation} \]

• Real yield: The real return investors require after excluding inflation
• Expected inflation: The future inflation rate expected by the market

Rising real yields can be particularly challenging for long-term growth-stock valuations because they raise the benchmark used to value future real cash flows.

In the US market, expected inflation can be observed approximately by comparing the following.

\[ \text{10-year BEI} \approx \text{10-year nominal Treasury yield}-\text{10-year TIPS real yield} \]

This can be interpreted as follows.

3-9. Rising rates also affect corporate earnings

Rates change actual corporate earnings and FCF as well as DCF discount rates.

Highly indebted companies

\[ \text{Borrowing rate}\uparrow \rightarrow \text{Interest expense}\uparrow \rightarrow \text{Net income and FCF}\downarrow \]

The effect depends on the following.

• Fixed versus floating interest rates
• Amount of debt maturing soon
• Need for new borrowing
• Credit rating
• Net debt
• Interest coverage ratio

Net-cash company

A company with substantial cash and short-term financial instruments may earn more interest income.

\[ \text{Deposit and bond yields}\uparrow \rightarrow \text{Interest income}\uparrow \]

For net-cash technology companies, interest income may therefore provide some cushion against valuation pressure from rising rates.

Consumer and property-related companies

Rising rates may reduce demand by increasing customers’ borrowing burdens.

\[ \text{Lending rate}\uparrow \rightarrow \text{Consumption and housing demand}\downarrow \rightarrow \text{Company revenue}\downarrow \]

Rates therefore affect enterprise value through two channels.

1. Discount-rate channel: WACC rises → value declines
2. Operating-performance channel: Changes in revenue, margins, interest expense and FCF

4. A simple numerical example

The following are all hypothetical figures for this lesson.

Example 1: the same KRW 100 hundred million has different rate sensitivity depending on when it is received

Company A: receives KRW 100 hundred million in 1 year

At a 5% discount rate:

\[ \text{Present value} = 100\div1.05 = 95.2\text{ hundred million KRW} \]

At a 6% discount rate:

\[ \text{Present value} = 100\div1.06 = 94.3\text{ hundred million KRW} \]

The decline in value is approximately 0.9%.

Company B: receives KRW 100 hundred million in 10 years

At a 5% discount rate:

\[ \text{Present value} = 100\div(1.05)^{10} \approx61.4\text{ hundred million KRW} \]

At a 6% discount rate:

\[ \text{Present value} = 100\div(1.06)^{10} \approx55.8\text{ hundred million KRW} \]

The decline in value is approximately 9.1%.

For the same KRW 100 hundred million, a 1 percentage point increase in the discount rate has a much larger effect the further into the future it is received.

This is the key reason why stocks whose value rests heavily on future growth expectations are sensitive to rising rates.

Example 2: earnings impact on a company with substantial floating-rate debt

Assume Company C has KRW 1,000 hundred million of floating-rate debt and its borrowing rate rises by 1 percentage point.

\[ \text{Additional interest expense} = 1,000\text{ hundred million KRW}\times1\% = 10\text{ hundred million KRW} \]

At a normalized income tax rate of 25%, a simple estimate of the decline in net income is as follows.

\[ \text{Decline in after-tax net income} = 10\times(1-25\%) = 7.5\text{ hundred million KRW} \]

If Company C previously earned net income of KRW 50 hundred million:

\[ \text{Net income decline rate} = 7.5\div50 = 15\% \]

A rate increase of just 1 percentage point could reduce net income by approximately 15%. Companies with large debt relative to earnings are thus highly sensitive to rate changes.

Example 3: rates rise while earnings forecasts improve

Suppose Company D’s original assumptions are as follows.

• Expected FCF: KRW 100 hundred million annually
• Discount rate applied: 8%
• Simple perpetuity value: \(100÷8\%=1,250\text{ hundred million KRW}\)

An improved economic growth outlook pushed rates higher, changing the assumptions as follows.

• Expected FCF: KRW 120 hundred million
• Discount rate applied: 9%

\[ \text{New value} = 120\div9\% \approx1,333\text{ hundred million KRW} \]

Although the discount rate rose, the FCF forecast increased by 20%, so the simple value rose from KRW 1,250 hundred million to approximately KRW 1,333 hundred million.

The rule “rising rates always mean falling share prices” therefore does not hold.

Always compare both of the following changes together.

\[ \text{Change in cash flow outlook}\quad vs \quad\text{Change in discount rate} \]

5. Practical use in stock and company analysis

① When the US 10-year yield jumps, first break down the causes

Instead of immediately selling growth stocks after news of rising rates, review the following in order.

Investment judgments differ depending on whether rates rise alongside better growth prospects or only the discount rate rises without a change in earnings.

② Examine 2-year and 10-year yields together

• US 2-year yield: Relatively sensitive to the expected Federal Reserve policy-rate path
• US 10-year yield: More affected by long-term growth, inflation, and term premiums
• 10-year minus 2-year spread: Shows the slope of the yield curve

For example:

• The 2-year yield surges while the 10-year rises only modestly
  → May signal stronger expectations of Fed tightening

• The 10-year yield rises more than the 2-year
  → May signal higher long-term growth, inflation, or term premiums

• Short-term yields fall while long-term yields remain stable or rise
  → Rate-cut expectations may coexist with long-term fiscal and inflation concerns

A yield spread alone cannot establish that a recession is coming, but it helps show how markets assess near-term policy differently from the long-term economy.

③ Classify companies by equity duration

More “yes” answers to the following suggest greater sensitivity to rising rates:

• Is FCF in 5–10 years more important than current FCF?
• Is the company currently loss-making, with future profitability central to its thesis?
• Does Terminal Value account for a large share of DCF value?
• Does the stock trade at a high P/E or revenue multiple?
• Must substantial CapEx be spent upfront?
• Is additional borrowing or equity issuance needed?
• Does today's high price assume distant-future market share?

Conversely, strong current FCF, low valuation, and substantial net cash may provide greater resilience to higher rates.

④ Examine the gap between earnings yield and government bond yields

The reciprocal of P/E is the earnings yield.

\[ Earnings\ Yield = \frac{1}{PER} \]

At a P/E of 20 times:

\[ Earnings\ Yield = 1\div20 = 5\% \]

A 5% earnings yield may look relatively attractive when US government bonds yield 2%. If government yields rise to 5%, more investors may consider equities' additional compensation insufficient.

However, this comparison requires caution.

• Government bond interest is contractual, while company earnings fluctuate.
• Company earnings can grow, while government bond coupons are fixed.
• P/E uses accounting earnings, while bond yields represent cash returns.
• Equities also involve reinvestment and buybacks, alongside dividends.

Use this comparison less as a simple numeric ranking and more to assess whether additional compensation for risk is shrinking as an analytical check.

⑤ For highly indebted companies, inspect maturities before interest rates

Higher rates do not immediately increase every company's interest expense.

• Substantial long-term fixed-rate debt → Limited immediate impact
• Substantial short-term floating-rate debt → Rapid impact
• Maturities concentrated in the next 1–2 years → Risk of higher refinancing rates
• Net cash position → Interest income may increase

Examine these three together:

\[ \text{Floating-rate debt share} \]

\[ \text{Debt maturing within }12\text{–}24\text{ months} \]

\[ \text{Net debt and FCF} \]

“When, how much, and at what rate must this company borrow again?” matters more than simply “rates rose by 1%.”

⑥ Distinguish earnings-driven from discount-rate-driven growth-stock declines

When share prices fall, the following classification is useful:

If shares fall solely because discount rates rise while long-term cash-flow prospects remain unchanged, an investment opportunity may emerge once valuation falls sufficiently.

Conversely, shares can fall even as rates decline if earnings prospects deteriorate more sharply.

⑦ The speed of rate changes can matter more than the absolute level

A 1-percentage-point rise in government yields over a long period gives companies and markets time to adapt. A sudden surge can trigger multiple problems at once:

• Rapid changes in DCF discount rates
• Bond valuation losses
• Margin and leverage pressures
• Surging mortgage rates
• Disrupted corporate refinancing plans
• Sharp contraction in equity multiples
• Forced trading by ETF, option, and quantitative strategies

Alongside yield levels, examine:

• Size of the increase
• Speed of the increase
• Volatility
• Change relative to market expectations
• Companies' time to respond

Market shocks often result less from high rates themselves than from unexpected direction and speed of the change.

6. What to look for in filings

Today's topic requires both company disclosures and market data.

What to check in company disclosures

Korean companies: DART

The Financial Supervisory Service's DART consolidated financial statements and notes should be reviewed for the following.

If interest-rate sensitivity analysis is disclosed, look for language such as:

The effect on pre-tax profit or equity of a specified change in market interest rates

Disclosed sensitivity usually reflects financial instrument balances at a particular date, not all future refinancing, new borrowing, or demand reductions.

US companies: SEC 10-K and 10-Q

SEC EDGAR for the following items.

• Debt
• Interest expense
• Interest rate risk
• Market risk
• Liquidity and Capital Resources
• Contractual maturities
• Fixed-rate and variable-rate debt
• Cash and marketable securities
• Credit facilities
• Covenants
• Pension and postretirement obligations
• Goodwill impairment
• Quantitative and Qualitative Disclosures About Market Risk

In US 10-K filings, market-risk information may primarily appear in Item 7A; in 10-Q filings, Part I, Item 3 can disclose significant changes.

Interest-rate data to check outside company filings

Government bond yields and real yields are market data, not corporate disclosures.

Representative primary and public sources you can consult directly include:

• US Treasury daily Treasury yields
• FRED US 10-year Treasury yield
• FRED US 10-year TIPS real yield
• FRED US 10-year breakeven inflation
• Federal Reserve FOMC materials

Use market yields from the same valuation date. Combining today's share price with month-old Treasury yields and credit spreads can produce misleading conclusions.

7. Key takeaways

• Higher US 10-year yields can increase the cost of equity and WACC, reducing the present value of future cash flows.
• Growth stocks with distant-future cash flows tend to be more sensitive to discount-rate increases than mature companies generating cash in the near term.
• The Fed does not directly set the US 10-year yield. Markets move it based on expected short-term rates, growth, inflation, Treasury supply and demand, and term premiums.
• When bond yields rise, existing bond prices fall.
• Growth-stock rate sensitivity depends on current FCF, Terminal Value reliance, valuation, debt, and additional financing needs.
• If rates rise because growth expectations strengthen, earnings upgrades may offset the discount-rate burden.
• If inflation, term premiums, or Treasury supply drive yields higher, discount rates may rise without improved corporate earnings.
• Separating nominal yields into real yields and expected inflation helps explain market reactions more accurately.
• Rates affect not only discount rates but also corporate interest expense and income, consumer demand, and real estate demand.
• When rates rise, check fixed- and floating-rate debt shares and debt maturing within the next 12–24 months.
• Investment analysis should consider the reason and speed of rate increases, earnings prospects, and credit spreads alongside the absolute rate level.

8. 3 review questions

Question 1

Assume two companies each receive a single cash flow of KRW 100 hundred million in 10 years.

• Present value at a 4% discount rate
• Present value at a 5% discount rate

Calculate each and determine the percentage decline in value.

Question 2

A company has KRW 3,000 hundred million of floating-rate debt. If its borrowing rate rises by 0.75 percentage points, how much additional annual interest expense results? With a 24% normalized tax rate, what is the simple after-tax profit reduction?

Question 3

US 10-year yields rise sharply, but a semiconductor company's EPS forecasts for the next 2 years also rise by 25%. Explain why one cannot conclude that higher rates must make its share price fall.

Answers and explanations

Answer 1

At a 4% discount rate:

\[ \text{Present value} = 100\div(1.04)^{10} \approx67.6\text{ hundred million KRW} \]

At a 5% discount rate:

\[ \text{Present value} = 100\div(1.05)^{10} \approx61.4\text{ hundred million KRW} \]

The percentage decline in value is:

\[ \text{Percentage change} = \frac{61.4-67.6}{67.6}\times100 \]

\[ \text{Percentage change} \approx-9.2\% \]

The discount rate rises by 1 percentage point, but the present value of cash received in 10 years falls by approximately 9.2%.

Answer 2

Additional interest expense is:

\[ \text{Additional interest expense} = 3,000\text{ hundred million KRW}\times0.75\% \]

\[ \text{Additional interest expense} = 22.5\text{ hundred million KRW} \]

The simple after-tax profit reduction is:

\[ \text{After-tax profit reduction} = 22.5\times(1-24\%) \]

\[ \text{After-tax profit reduction} = 17.1\text{ hundred million KRW} \]

The actual after-tax effect may differ if the company is loss-making or cannot fully deduct interest for tax purposes.

Answer 3

Because share prices are affected by both discount rates and future cash flows.

• Higher 10-year yield → Higher WACC and discount rate → Negative for valuation
• 25% EPS forecast upgrade → Potentially higher future earnings and FCF → Positive for enterprise value

The actual share-price direction therefore depends on whether the value reduction from higher discount rates or the value increase from better earnings prospects is larger.

Also check:

• Do EPS upgrades translate into actual FCF upgrades?
• Is the 10-year yield increase driven by real rates, expected inflation, or term premiums?
• Are EPS upgrades due to a temporary industry peak?
• Has the current share price already reflected the earnings upgrades?
• How are the company's debt and CapEx burdens changing?

Next lesson — Day 13 · Practical company analysis:
“Question today's share price before setting a target — Reverse-engineering market expectations with Reverse DCF”