Treasury Yields and Stock Prices

Page 1

Treasury Yields & Stock Prices

• Educational Presentation #17 – Hedge Funds

• 23.10.2026

• Property of the ESCP Alternative Investment Society (AIS)

• Sources: FRED; Federal Reserve; NY Fed; US Treasury; CBO; FactSet; S&P Dow Jones Indices; A. Damodaran; R. Shiller; Reuters; Financial Times; J.P. Morgan

Page 2

Agenda

Four questions, from where yields are today to what that means for stocks

I Why Yields Are at Their Highest Since 2002 What a Treasury yield is, what moves it, and why 2026 is a real-yield shock

II How Yields Feed Into Stock Prices How the 10-year sets the discount rate for stocks, and why stocks have held up so far

III Historical Case Studies 1996 to 2000, 2008 and 2013: what past rate shocks did to stocks

IV Is This Time Different? Our model, Bessent’s push for lower yields, three paths for the 10-year, and our view

✓ Key Takeaways Four questions to ask when yields move

Page 3

Summary: earnings absorbed higher yields, but the yield gap is gone

What each section of this deck shows, and the number that sums it up

Our answer in four steps

I Yields are at a 2002 high, and the Fed did most of the lifting The 10-year closed at 5.31% on 5 Oct; up 106bp in 2026, of which 98bp in real yields 5.24% 10-year, 9 Oct

II Stocks held up because earnings outran the discount rate The multiple fell 6.4% since June, but forward earnings rose 10.4%; the yield gap is now 0bp 0bp yield gap

III History: why yields move matters more than how far 2008: yields −179bp, S&P 500 −38.5%. 2013: 10-year +126bp over the year, S&P 500 +29.6% +29.6% S&P 500 in 2013

IV Our model says 17.5x, not 19.1x: about 8% downside It stays a “good” yield rise only if the Fed stops by December; next tests 28 Oct and 4 Nov 17.5x our fair P/E

Earnings have absorbed higher yields so far; with no yield gap left, the index now depends on growth delivering

Page 4

Section I: Why Yields Are at Their Highest Since 2002

Page 5

Section I: Why Yields Are at Their Highest Since 2002

Yields hit a 2002 high, yet stocks set records: one market has it wrong

The 10-year rose 85bp in Q3, its joint largest quarterly rise since 2000, to a 5.31% close on 5 Oct, the highest since May 2002

10-year Treasury yield, weekly close since 2000, %

Total return in Q3 2026, %

5.31% on 5 Oct 2026: highest close since May 2002

S&P 500

+2.3%

US high yield

-1.7%

5.24%

US Treasuries

-3.0%

US investment grade

-3.8%

EM sovereigns

-4.0%

US agency MBS

-4.3%

Either stocks know something bonds don’t, or they are underpricing rate risk: the rest of this deck tests which

Source(s): FRED (DGS10), weekly closes to 9 Oct 2026; J.P. Morgan (2 Oct 2026), total returns to 30 Sep; US Treasury

Page 6

Section I: Why Yields Are at Their Highest Since 2002

The 2-year follows the Fed, the 10-year prices the next decade

A Treasury yield is the annual return for lending to the US government until maturity; it moves opposite to the bond’s price

2-year vs 10-year Treasury yield, %

What each maturity is telling us

31 Dec 2025 9 Oct 2026

1 The 2-year is pricing more hikes At 4.80% it sits well above the 3.75–4.00% fed funds rate: markets expect the Fed to keep raising, not to cut

3.47% 4.18% 4.80% 5.24%

2 The Fed agrees 16 of 18 officials see at least one more hike in 2026; median yearend rate 4.125%

2-year 10-year

3 The curve has flattened The 10-year minus 2-year gap narrowed from 71bp to 44bp this year, as the short end rose faster

+133bp on the 2-year vs +106bp on the 10-year

The 2-year tells you what the Fed does next; the 10-year adds what investors want for tying money up for a decade

Source(s): FRED (DGS2, DGS10), 31 Dec 2025 and 9 Oct 2026; Federal Reserve Summary of Economic Projections (Sep 2026)

Page 7

Section I: Why Yields Are at Their Highest Since 2002

Three building blocks: the Fed path, inflation and the term premium

Every 10-year yield is what the Fed is expected to do, plus cover for inflation, plus extra pay for locking money up

Expected Fed path

Inflation compensation

Term premium

The average policy rate investors

The average inflation investors

= 10-year Treasury yield

Extra yield for holding a 10-year bond instead of rolling 3-month

expect over the next 10 years +

expect over the bond’s life +

bills

“Good” vs “bad” rises for stocks

Good rise: the economy is stronger

Bad rise: investors just want more to lend

1 Growth lifts the expected Fed path A stronger economy means investors expect more hikes

1 The term premium or real yields jump Investors demand more to hold bonds; growth does not change

2 Earnings forecasts rise too Profits grow with the economy and offset the higher discount rate

2 Only the discount rate rises Earnings forecasts do not move, so nothing offsets it

3 Stocks can absorb it As in 2013: 10-year +126bp over the year, S&P 500 +29.6%

3 Valuations fall As in 2022: 10-year +237bp, S&P 500 −18.1%

Which block moved matters more than the size of the move: it tells you whether earnings rise alongside the discount rate

Source(s): Federal Reserve Bank of New York (ACM term premium model); FRED (DGS10, DFII10, T10YIE)

Page 8

Section I: Why Yields Are at Their Highest Since 2002

Four forces move yields; in 2026 they worked mainly through the Fed

Each force pushes on a different building block; oil lifted inflation, but the Fed’s turn to hiking did most of the lifting

1 The Fed

2 Inflation

3 Government borrowing

4 Foreign demand

Moves: Expected Fed path Rate decisions and guidance set the path investors expect

Moves: Inflation compensation Oil, wages and tariffs shape the inflation investors expect

Moves: Term premium If overseas buyers step back, the premium has to rise

Moves: Term premium The more bonds the Treasury sells, the more investors want to hold them

In 2026 −75bp, then +25bp Three cuts in late 2025, then a hike on 16 Sep

In 2026 $61 → $138 Brent, end-2025 to the 7 Apr peak (Iran war)

In 2026 $2.0tn FY2026 deficit, $218bn above FY2025

In 2026 80.3% Indirect bid at the 7 Oct 10-year auction (71.8% average)

+8bp 10-year breakeven inflation in 2026

+133bp 2-year yield in 2026, vs +106bp for the 10-year

Flat Coupon auction sizes; bills took the extra borrowing

6.03%, 4.24% UK and Japan 30-year highs: the selloff is global

Role in 2026 Main driver

Role in 2026 Indirect, via the Fed

Role in 2026 Adds to the term premium

Role in 2026 Demand holds up

The expected Fed path and real yields did the lifting, not inflation: the next slide measures how much

Source(s): Federal Reserve; FRED (DGS2, DGS10, T10YIE), to 9 Oct 2026; BLS; CBO; US Treasury; TreasuryDirect; Reuters

Page 9

Section I: Why Yields Are at Their Highest Since 2002

Almost all of 2026’s rise in the 10-year came from real yields, the kind that compresses valuations unless earnings keep up Not all yield rises are equal: 2026 is a real-yield shock

10-year yield: nominal vs real vs inflation expectations

6%

5.24%

1 +106bp 10-year yield change in 2026 (to 9 Oct)

3 +8bp of which inflation expectations

5%

4%

3%

+98bp of which real yield (TIPS)

~92% Share of the rise driven by real yields

2.91% 2.33%

2%

1%

2026 YTD: what moved the 10-year

0%

-1%

Nominal 10-year yield 4.18% → 5.24%

-2%

Real yield (TIPS) 1.93% →2.91%

Inflation expectations 2.25% → 2.33%

Nominal 10-year Real yield (TIPS) Inflation expectations

Peak real yield (5 Oct) 2.95%

• A real-yield rise lifts the hurdle rate for every stock: it is only ‘good’ if earnings rise with it, the test the rest of this deck applies • Inflation expectations barely moved (+8bp): markets see the oil shock as temporary, so this is a Fed and term-premium story

Source(s): FRED (DGS10, DFII10, T10YIE), daily, Jan 2022 to 9 Oct 2026

Page 10

Section II: How Yields Feed Into Stock Prices

Page 11

Section II: How Yields Feed Into Stock Prices

Stocks are long bonds: +100bp on the 10-year ≈ −16% on fair value

Holding earnings and the risk premium fixed, the discount rate alone moves the fair S&P 500 multiple by ~3–4 turns per 100bp

Fair forward P/E: 10-year yield × equity risk premium

How the transmission works

10y \ ERP 3.0% 3.5% 4.0% 4.23% 4.5% 5.0% 6.0%

10y yield ↑ Discount Rate ↑ Fair P/E ↓

4.5% 30.6x 26.6x 23.4x 22.2x 21.0x 19.0x 16.0x

r = 10y + ERP P/E = 1 / (r − g)

5.0% 26.6x 23.4x 21.0x 20.0x 19.0x 17.3x 14.8x

5.24% today 25.0x 22.2x 20.0x 19.1x 18.2x 16.7x 14.3x

5.5% 23.4x 21.0x 19.0x 18.2x 17.3x 16.0x 13.8x

10y yield Discount Rate Fair P/E

6.0% 21.0x 19.0x 17.3x 16.7x 16.0x 14.8x 12.9x

6.24% +100bp 20.0x 18.2x 16.7x 16.0x 15.4x 14.3x 12.5x

9.47% 19.1x

5.24%

6.5% 19.0x 17.3x 16.0x 15.4x 14.8x 13.8x 12.1x

7.0% 17.3x 16.0x 14.8x 14.3x 13.8x 12.9x 11.4x

6.24% 10.47%

16.0x (−16%)

Today After

Blue = richer than today’s 19.1x · red = cheaper

+100bp

Down the 4.23% column, +100bp on the 10-year takes the fair P/E from

19.1x to 16.0x

A +100bp rise in the 10-year takes fair value from ~7,760 to ~6,520 on the S&P 500:

Small moves in yields now result in large moves in value

11 Source(s): FactSet (S&P 500 forward P/E, Oct 2026); FRED (DGS10, SP500), 9 Oct 2026; A. Damodaran (implied equity risk premium, Oct 2026)

Page 12

Section II: How Yields Feed Into Stock Prices

The yield gap has disappeared

The S&P 500 now yields almost exactly what a risk-free 10-year Treasury does, a setup last seen around 2000

Earnings yield minus 10-year yield: today vs key moments

1 5.24% S&P 500 earnings yield (1 ÷ 19.1x forward P/E)

After the GFC stocks paid ~6pp over bonds; today ≈0 Of these moments, only the 1999 dot-com peak was thinner (−3.4%)

+5.84%

2 5.24% Risk-free 10-year Treasury yield (9 Oct 2026)

+2.82%

+1.60%

3 0bp Extra yield for owning stocks (1960–2025 avg: +75bp)

+0.75% 0.00%

4 4.23% Second lens: Damodaran implied ERP (avg 4.25%)

−3.37%

Oct 2026

1999 dot-com

2007 pre-GFC

2011 post-GFC

2021 pre-hikes

1960–2025 average

(today)

Year-end earnings minus 10y yield

Oct 2026 = forward basis

Investors are paid almost nothing extra to own stocks: valuations now rely on earnings growth delivering, not on cheapness

Source(s): A. Damodaran, implied ERP (annual, 1960–2025); FactSet (forward P/E 19.1x, Oct 2026); FRED (DGS10), 9 Oct 2026

Page 13

Section II: How Yields Feed Into Stock Prices

Growth stocks are the long bonds of the equity market

A +100bp rise hits distant cash flows hardest; 2022 proved it, but in 2026 earnings growth protected tech

Hit from a +100bp rise in the 10-year (our model)

S&P 500 sector total returns, 2022 (10-year +237bp)

Energy

+65.7%

10y Treasury

-7.3%

Utilities

+1.6%

Cons. Staples

-0.6%

Value Co

-11.8%

Health Care

-2.0%

S&P 500

-16.0%

Industrials

-5.5%

Financials

-10.5%

Growth Co

-17.5%

Materials

-12.3%

S&P 500

-18.1%

Value Co Growth Co

Real Estate

-26.1%

Info. Technology

-28.2%

Cash-flow growth ~2% a year 15% a year for 10 years

Cons. Discretionary

-37.0%

Value from years 11+ 49% 75%

Comm. Services

-39.9%

Effective duration 11.8 years 17.5 years

Long-duration stocks lose most when yields rise without growth; in Q3 2026 tech rose 7.2% while utilities fell 12.4%

Source(s): Our calculation (two-stage DCF, fair P/E model); S&P Dow Jones Indices (sector total returns, 2022 and Q3 2026); FTSE Russell; FRED

Page 14

Section II: How Yields Feed Into Stock Prices

So why haven’t stocks fallen? Earnings outran the discount rate

Since June the 10-year rose 78bp and the market multiple fell 6%, yet 10% earnings upgrades lifted the index

S&P 500, 30 Jun to 8 Oct 2026: what drove the index

P/E Multiple: 20.4x → 19.1x (−6.4%) Higher yields cut what investors pay per $ of earnings

+10.4%

+3.4%

EPS Forward earnings: +10.4% Analysts raised 12-month EPS estimates since 30 Jun

+32.7% Expected S&P 500 earnings growth in 2026 (FactSet): the engine holding stocks up despite 5%+ yields

-6.4%

S&P S&P 500: +3.4% (actual +3.5%) Price = EPS × P/E: earnings beat the squeeze

Earnings (EPS) Multiple (P/E) S&P 500

10-year +78bp P/E −6.4% EPS +10.4% S&P 500 +3.4%

Stocks held up because earnings outran the discount rate: the risk is growth slowing while yields stay above 5%

Source(s): FactSet Earnings Insight (2 Jul and 9 Oct 2026 reports, data to 8 Oct); FRED (SP500, DGS10)

Page 15

Section III: Historical Case Studies

Page 16

Section III: Historical Case Studies

2026 rhymes with 1999, but today’s risk premium is twice as thick

Greenspan flagged stretched valuations in 1996; the S&P 500 still doubled before Fed hikes and an earnings bust ended the run

What happened

S&P 500, monthly average

1,600

1 5 Dec 1996: Greenspan asks whether “irrational exuberance” has inflated asset values. S&P 500 at 744.

1,200

2 Sep to Nov 1998: After Russia’s default and LTCM, the Fed cuts three times, from 5.50% to 4.75%.

3 Jun 1999 to May 2000: Six hikes take the Fed to 6.50%; the 10-year peaks at 6.79%.

Fed funds target and 10-year yield, %

4 24 Mar 2000: The S&P 500 peaks at 1,527, up 105% since the speech. By Oct 2002 it is down 49%.

Fed funds target 10-year yield

Then and now 1998 to 2000 2025 to 2026

Insurance cuts −75bp (1998) −75bp (2025)

Hikes so far +175bp, to 6.50% +25bp, to 4.00%

S&P 500 earnings growth +24% (1999) +33% (2026e)

Equity risk premium 2.05% (end-1999) 4.23% (Oct 2026)

The 1999 path needs more hikes and an earnings disappointment: markets price the first, not the second

Source(s): Federal Reserve; FRED (DFEDTAR, DGS10); R. Shiller, Yale; FactSet (9 Oct); A. Damodaran; J.P. Morgan (21 Sep)

Page 17

Section III: Historical Case Studies

2008: Paulson’s “bazooka” rescued bondholders, not shareholders

Fannie Mae and Freddie Mac were taken over on 7 September, and the 10-year yield then fell together with the S&P 500

What happened

10-year Treasury yield, %

1 13 Jul: With Fannie Mae and Freddie Mac shares down about 75% in 2008, Paulson asks Congress for authority to backstop them.

2 30 Jul: The powers become law. His argument: if markets know you have a “bazooka”, you may never have to use it.

2.25% 2.0 2.5 3.0 3.5 4.0 4.5

3 7 Sep: He uses it anyway: both firms are taken over, with up to $100bn each (about $190bn is eventually drawn).

Share prices, 31 Dec 2007 = 100

4 25 Nov: The Fed pledges to buy up to $600bn of agency debt and mortgage bonds. The 10-year falls 24bp that day.

S&P 500 Fannie Mae

What does this teach an equity analyst?

A backstop for debt is not a backstop for equity Mortgage rates fell 42bp in a week; the shares lost 90% and 83%.

Lower yields do not help stocks when fear drives them The 10-year fell 179bp in 2008, and the S&P 500 still lost 38.5%.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Ask why yields move and who a backstop protects: Bessent’s buybacks face the same test as Paulson’s bazooka

Source(s): FRED (DGS10, MORTGAGE30US); Yahoo Finance (^GSPC, FNMA, FMCC); US Treasury, FHFA, Federal Reserve (2008); Yale PFS

Page 18

Section III: Historical Case Studies

2013 Taper Tantrum: talk lifted yields a full point, yet stocks rose 30%

The Fed changed nothing until December; the 10-year rose from 1.94% to 2.98% (21 May to 5 Sep), all of it in real yields

What happened

10-year Treasury yield, %

Nominal Real 1 2 3 4

3.04%

1 22 May: Fed Chair Bernanke says the Fed could soon slow its $85bn-a-month bond buying. No rate hike, no change yet.

2 19 Jun: He sets a timetable to end purchases by mid-2014. The 10year rises 40bp in a week; the S&P 500 loses 3.9% in two days.

0.80%

-1.0

3 18 Sep: Markets expect the taper to start. The Fed holds off and the 10-year drops 17bp in a day.

S&P 500, index level

4 18 Dec: The taper arrives: purchases are cut to $75bn a month. The 10-year moves 4bp; the S&P 500 closes at a record.

1,900

1,848

1,800

What does this teach an equity analyst?

1,700

1,600

Markets price the expectation, not the event The 10-year rose 104bp on talk of tapering, and 4bp when it came.

1,500

1,400

Growth and a yield gap let stocks absorb the rise S&P 500 +29.6% with a 2.8-point yield gap; end-2025: 0.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Higher yields hurt stocks unless growth or a yield gap offsets them: in 2013 both did, today the yield gap is gone

Source(s): FRED (DGS10, DFII10); Yahoo Finance (^GSPC); Federal Reserve testimony and FOMC statements (2013); A. Damodaran (2026)

Page 19

Section IV: Is This Time Different?

Page 20

Section IV: Is This Time Different?

History says multiples only crack above 7%, with high inflation

Median S&P 500 P/E on trailing reported earnings, by level of the 10-year yield, monthly data 1960 to 2023

Median P/E by 10-year yield band (x)

Street view

Today: 5.24%

6.0% is where most fund managers would switch from stocks to bonds (BofA survey, Oct 2026)

CPI inflation below 3% CPI inflation 3% or higher

“Equities can handle higher yields”: J.P. Morgan (21 Sep)

calls 2026 “an oil and rates shock”

Our test

Up to a 7% 10-year, the median P/E held near 18x or higher

Above 7%, it fell to 9x to 17x, mostly with inflation above 3%

<3% 3 to 4% 4 to 5% 5 to 6% 6 to 7% 7 to 8% 8 to 10% >10%

But today’s ~27x trailing P/E is far above these medians:

history backs a 5% yield, not today’s multiple

Bands with fewer than 12 months are not shown. The 5 to 6% low-inflation bar reflects the 1995 to 2001 boom.

A 5% 10-year is not a cliff for stocks; inflation that keeps the Fed hiking is

Source(s): R. Shiller, Yale (1960 to 2023), our calculation; BofA Fund Manager Survey (Oct 2026); J.P. Morgan (21 Sep)

Page 21

Section IV: Is This Time Different?

Our model says 17.5x, not 19.1x: stocks priced only half the shock

Bridge of the S&P 500 forward P/E from 30 Jun to 9 Oct 2026, holding June’s risk premium and growth assumption fixed

S&P 500 forward P/E bridge, 30 Jun to 9 Oct 2026 (x) Three ways to explain the 1.6x gap

20.4x −2.9x

+1.6x 19.1x

Investors accept a thinner premium Premium minus growth fell about 47bp. Damodaran’s cash-yield ERP, 3.70%, is the lowest since 2008.

17.5x

14x 15x 16x 17x 18x 19x 20x 21x

30 Jun actual Rate effect 9 Oct model Premium,

9 Oct actual

2 Growth expectations rose Forward EPS is up 10.4% since June; FactSet sees earnings +33% in 2026 and +16% in 2027.

growth

Axis starts at 14x to show the steps; bars are drawn to scale above it

Formula: earnings yield (1 ÷ P/E) = 10-year yield + risk premium − growth

The market sees the spike as temporary Strategists see 5.00% by year-end and 4.75% in 12 months, but have underestimated yields nine months running.

Earnings yield = 10-year + premium − growth P/E 30 Jun actual 4.90% 4.44% 0.46% 20.4x 9 Oct model 5.70% 5.24% 0.46% (held) 17.5x

Unless growth or a lower 10-year arrives, the index multiple has about 8% of downside to our model

Source(s): FactSet (2 Jul, 9 Oct 2026); FRED (DGS10); A. Damodaran (1 Oct); Reuters poll (7 Oct); our calculation

Page 22

Section IV: Is This Time Different?

Bessent is half right, and his buybacks are too small to fix the rest

The long-end selloff is global, but the US 10-year rose more than Japan’s and Germany’s, mostly on the expected Fed path

Change in yields, end-2025 to 30 Sep 2026, bp

NY Fed 10-year term premium, %, daily

10-year 30-year

19 Aug: buybacks doubled, −10bp on the day

0.90%

United States Japan Germany

Jun Jul Aug Sep Oct

$21bn bought back in four operations, 10 Sep to 8 Oct

Bessent: “global issues” True for the long end: UK, French and Japanese long yields hit multi-decade or record highs

0.4% of the $5.4tn of Treasuries with over 10 years left

But is it only global? Only half true: the US 10-year rose 111bp, more than Japan’s (99bp) and Germany’s (71bp)

9% of the $231bn of long bonds auctioned Aug to Oct

The Fed explains most of the rise and buybacks are 0.4% of long debt: watch the 4 Nov refunding for anything bigger

Source(s): FRED; Bundesbank; Japan MOF; NY Fed (ACM, to 9 Oct 2026); fiscaldata.treasury.gov; US Treasury; J.P. Morgan (2 Oct); Reuters (15 Sep)

Page 23

Section IV: Is This Time Different?

Three paths for the 10-year, and what each means for fair value

Fair forward P/E from our model under each path, at today’s thin risk premium and at June’s (19.1x today, with the 10-year at 5.24% on 9 Oct)

Rates retreat

Consensus holds

Break above 6%, premium back to 5%

10-year Fair P/E (vs 19.1x) 4.75% 21.1x +10%

10-year Fair P/E (vs 19.1x) 5.00% 20.0x +5%

10-year Fair P/E (vs 19.1x) 6.00% 14.8x −23%

−49bp vs 9 Oct June premium: 19.2x, +0.5%

−24bp vs 9 Oct June premium: 18.3x, −4%

+76bp vs 9 Oct June premium: 13.8x, −28%

What it takes: The Fed stops after December

What it takes: One more hike and no fiscal

What it takes: Hikes into 2027 and the risk

and oil fades

shock

premium returns to 5%

Who sees it: Goldman Sachs; Reuters poll

Who sees it: Reuters poll median for year-

Who sees it: Fund managers’ switch point to

median in 12 months

end; BofA and Citi

bonds (BofA)

Street view vs our test: consensus sits on the middle path, but strategists have underestimated the 10-year nine months running and 28 of

30 see the risks skewed higher (Reuters, 7 Oct).

14 Oct (done) CPI: 3.7%, core 2.6%

15 Oct (done) Chair Warsh spoke

28 Oct FOMC decision

29 Oct Q3 GDP

3 Nov US midterms

4 Nov Treasury refunding

Upside needs the Fed to stop and investors to stay generous; downside needs only more of the same

Source(s): our model (FactSet, FRED, A. Damodaran, 9 Oct 2026); Reuters poll (7 Oct); Bloomberg; BofA survey

Page 24

Section IV: Is This Time Different?

Our view: stocks are priced for the good kind of higher yields

What today’s 19.1x is betting on, what could break it, and what would change our mind

What stocks are betting on

What could break it

1 Earnings keep compounding FactSet: +33% in 2026 and +16% in 2027

1 The Fed is still hiking 16 of 18 officials see more; CPI lifted the 2-year 13bp

2 Inflation is oil, not wages Core CPI 2.6% vs 3.7% headline in September

2 No yield gap left Earnings yield equals the 10-year; our fair value 17.5x

3 A narrow market Over 4 in 10 S&P 500 stocks are down this year

3 History tolerates 5% The median P/E held at 18x or more up to a 7% 10year

4 Treasury demand holds 80.3% indirect bid at the 7 Oct 10-year auction

4 Credit is cracking underneath CCC spreads widened from 885bp to 1,253bp

What would change our mind: a Fed hold in December, core CPI back below 2.5%, or credible fiscal measures at the 4 Nov refunding.

Our call: cautious on the index multiple, not on earnings; it stays a ‘good’ yield rise only if the Fed stops by December

Source(s): FactSet (9 Oct 2026); Fed SEP (Sep 2026); BLS; R. Shiller; TreasuryDirect (7 Oct); Reuters (12 Oct); ICE BofA via FRED; our model

Page 25

Key Takeaways

Key takeaways: four questions to ask when yields move

What an analyst should check when yields move, and what each episode in this deck taught us

Four questions to ask

What each episode taught us

1 Which block moved? The Fed path, inflation compensation or the term premium

1 1996 to 2000: valuation alone doesn’t time the top The Fed, then earnings, ended the run three years later

2 Are earnings rising with it? If yes, stocks can absorb it; if not, multiples compress

2 2008: a backstop for debt is not one for equity Mortgage rates fell 42bp; shareholders lost 90% in a day

3 How much yield gap is left? Earnings yield vs 10-year; premium vs 4.25% average

3 2013: growth-driven rises get absorbed The 10-year rose 126bp over 2013, yet the S&P 500 rose 29.6%

4 How long are the cash flows? Growth and long-duration sectors take the biggest hit

4 2026: a real-yield rise with no yield gap left Earnings must keep delivering for today’s 19.1x to hold

Our answer: yields hit stocks through the discount rate; whether a rise hurts depends on why yields move and if earnings keep up.

Ask why yields are moving before asking how far: the reason decides what happens to stocks