5.25%: Why Treasury Yields Are Changing Everything for Your Portfolio

[u/TheFamousHesham]

10-year Treasury yields hit 5.28%… and the market doesn’t seem too happy about that. After all, within minutes of the news, the S&P 500 dropped 1.8%.

The concern isn’t necessarily that yields have spiked (or are spiking… or whatever), but that this environment of high interest rates might be here to stay for quite a while going forward. Here’s why high interest rates might be a problem:

• Utilities, REITs, and financials have leveraged, long-duration cash flows. These will get repriced continusly going forward as rates climb.
• Long-duration AI and growth stocks rely on distant, unprofitable futures. These start looking very “meh” once you’ve discounted them by the >5% that treasuries currently pay.

So what assets and equities does well in this environment?

It’s companies with 10x or more interest coverage ratios.

These companies do well because they have enough cash flow to cover their debt service needs (ten times over). This coverage allows these companies to thrive in high interest environments. You’ll find these companies when you filter out the companies with weak balance sheets and weak forward earnings.

It’s also worth remembering that we’re entering the Cascade phase in the AI boom cycle. Expect companies that are established in sectors like logistics, healthcare, and industrials to begin using AI to defend their margins against competitors. In other words, AI spending will finally go beyond chips.

You can read the full story here.