Why do Treasury yields affect stocks?
Treasury yields affect stocks by changing discount rates, borrowing costs, risk appetite, and the relative appeal of bonds.
The short version
Treasury yields are a baseline for how markets price money over time. When yields rise, future earnings are discounted more heavily and bonds may compete more with stocks. When yields fall, valuations can get support if growth is not collapsing.
Discount-rate effect
Stocks are claims on future cash flows. Higher yields can reduce what investors are willing to pay for those future cash flows, especially for growth companies whose profits are expected far in the future.
Borrowing-cost effect
Higher yields can raise financing costs for companies and consumers. That can pressure margins, investment, housing, credit, and economic growth.
Why yield moves can be bullish or bearish
Yields rising because growth is strong can be easier for stocks to absorb than yields rising because inflation is sticky. Yields falling because inflation cools can help stocks; yields falling because recession risk is rising can hurt them.
What to watch
Compare nominal yields, real yields, inflation expectations, credit spreads, earnings revisions, and sector leadership. Growth stocks, banks, utilities, and dividend stocks can react differently.