10-Year U.S. Treasury yield hits 5%, pressuring stock and bond valuations

The 10-Year U.S. Treasury yield has reached 5%, its highest level since 2007, driven by inflation linked to the Iran war, increased corporate debt issuance for AI technologies, and rising U.S. government borrowing. These factors have pushed borrowing costs higher across the market.

As yields climb above the 5% threshold, 10-Year Treasuries become more competitive income investments compared to equities. The S&P 500 currently offers a combined yield of 1%, while the Schwab U.S. Dividend Equity ETF (SCHD) pays a trailing yield of 3%. Investors may shift capital away from stocks toward T-bills in response to this yield differential.

Rising interest rates also compress valuations for high-growth stocks. When rates are low, investors often pay premiums for future growth, and companies can borrow cheaply to expand. Higher rates reduce these premiums and increase borrowing costs, creating headwinds for tech stocks trading at elevated multiples.

For bond investors, higher Treasury yields present a mixed picture. Newly issued government bonds offer more attractive yields for income seekers, while corporate bonds must offer higher yields to remain competitive. However, the market value of older bonds issued at lower rates declines as newer, higher-yielding issues enter the market. A bond with a 3% coupon, for example, could see its value drop from $1.00 to $0.80 per dollar as rates rise.

Long-term investors holding bonds to maturity will still receive their full principal, rendering temporary price dips less significant. Short-term traders, however, face potential losses if they sell before maturity. While higher yields hurt stocks more than bonds, they still reduce the value of existing lower-yielding bonds and drive rotation toward newer issues.