Implications of US Ten Year Interest Rate - November 23, 2023

The chart below shows the Ten-Year US Treasury rate in the top pane, and the Nasdaq 100 Stock Index in the lower pane.  

The U.S. Ten-Year Treasury interest rate is considered crucial for several reasons, and its importance extends beyond the bond market. Here are just a few key reasons why the U.S. Ten-Year interest rate is closely watched: 

• Discount Rates and Valuation: The most direct impact of interest rates on equities is through the discount rate used in valuation models.  

• Cost of Capital: Interest rates also affect a company's cost of capital. As interest rates rise, borrowing costs increase, which can negatively impact corporate profits.  

• Economic Growth Expectations: Changes in interest rates often reflect expectations about future economic conditions. Lower interest rates may be interpreted as a signal of economic stimulus, potentially boosting corporate earnings and supporting higher equity prices. Conversely, higher interest rates might signal expectations of economic cooling or inflation concerns, leading to lower equity valuations. 

• Borrowing Costs for Corporations: Companies often use debt for financing. When interest rates rise, borrowing becomes more expensive for corporations, impacting their profitability.  

• Consumer Spending and Housing Market Impact: Higher rates can lead to increased borrowing costs for consumers, affecting spending patterns.  

This July, as the TNX relentlessly pushed past last October highs at 4.3%, pressure on the stock market became clear. 

As the TNX pulling back from over 5% it was like a pressure valve was released, allowing the equity market to advance. Now, with the TNX pausing at 4.415%, just above the October “support” level, would be a logical time for the equity advance to pause. What happens next will provide insight into the strength of the recent advance. 

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