What a 5% Treasury yield does to the picks

Rates went up for two reasons

On September 16, 2026, the Federal Reserve raised its target range by 0.25 percentage points, to 3.75% to 4.00%. The vote was 12 to 0 [1]. The Fed cut three times in late 2025, to 3.50% to 3.75%, and this was its first rise after those cuts [2]. The statement says that "inflation remains elevated" [1]. The consumer price index rose about 3.4% in the 12 months to August 2026 (my arithmetic on the index) [3]. Core PCE inflation, which leaves out food and energy, was 3.0% in August [34]. The median Fed official now expects a rate of 4.1% at the end of 2026 and at the end of 2027. In June, the medians were 3.8% and 3.6% [5]. That median implies one more rise this year, and the minutes say that "most participants" expected another rise "by year end" [4].

Long yields rose more than the Fed rate. The 10-year yield closed at 5.31% on October 5, its highest close since May 2002 [6]. The 10-year breakeven inflation rate stayed near 2.3% [7]. The real yield on 10-year inflation-protected Treasuries went from 2.20% on June 30 to 2.87% on October 8 [8]. Investors ask for a higher real return, and their inflation expectations stayed almost the same.

The New York Fed's term structure model divides the rise into two parts. From June 30 to October 8, 2026, its fitted 10-year yield rose 0.74 points, from 4.48% to 5.22%. The term premium, the extra yield that investors ask to hold a long bond, gave 0.41 points. A higher expected path for short rates gave 0.33 points (my arithmetic on the model) [9].

The Fed minutes list the reasons that market commentary gave for the higher term premium. These are geopolitical events, uncertainty about the Treasury's buyback program, and "competition for capital from heavy private debt issuance to finance" AI infrastructure [4]. At the press conference, Chair Kevin Warsh said that "the so-called hyperscalers are out in the market raising funding" [10]. The government also borrows more. CBO puts the fiscal 2026 deficit at $2.0 trillion and net interest at $1.1 trillion, 11% more than in 2025, according to a press report [11]. In August, Treasury kept its auction sizes the same and said that it expects to keep them "for at least the next several quarters" [12].

Stocks now yield about the same as bonds

The S&P 500 traded at 19.1 times its expected earnings for the next 12 months on October 9, 2026. On June 30 the figure was 20.4 [16]. Its earnings yield is about 5.2% (my arithmetic), almost the same as the 10-year yield [6][16]. The index rose 3.5% after June 30 because earnings estimates rose 10.4% in the same period [16]. The Fed minutes say that this year's stock gains came from earnings, while price-to-earnings multiples fell [4].

Credit markets stay calm. The spread on high-yield bonds rose from 2.75% on June 30 to 3.15% on October 8, and it is still low [15]. Companies can borrow. They pay more because the base rate is higher.

The picks fell while the index rose. From August 28 to October 9, 2026, the 10-year yield went from 4.73% to above 5.2% [6]. In the same weeks, the S&P 500 rose 1.3%, and the median pick fell about 3.7% (my arithmetic on the daily closes of the 48 picks with a US price) [17]. Each company also had its own news, so rates explain only part of each move.

Debt is the first channel

The picks with high debt and weak interest cover fell most. Campbell's operating profit covered its interest only about 2.6 times in fiscal 2026 [18]. On September 23, Moody's cut Campbell's to Baa3, the lowest investment grade, with a negative outlook [19]. Wynn's operating income covered its interest only about 1.9 times in the first half of 2026. About $1.35 billion of its debt is due in 2027, and in September it replaced 5.25% notes with 6.875% notes [20]. Clorox's net debt is about 4.2 times its fiscal 2026 EBITDA, and $1.09 billion of commercial paper pays floating rates [21]. At Sucro, interest of US$23.3 million used almost all of the US$24.0 million of adjusted EBITDA in the 12 months to June 30, 2026 [22]. PG&E must refinance $2.15 billion of 4.25% convertible notes due December 1, 2027 [23].

Some picks reset their debt soon. Yum must repay or refinance at least $500 million of its June 2027 notes 91 days before they mature. If it does not, its term loan and its revolver also come due [24]. Pool Corporation borrows at variable rates. Two swaps fix the rate on $300 million, and both end on February 26, 2027 [25]. Only 54% of RELX's borrowings have a fixed rate, and their average remaining life is 3.7 years [26].

Long fixed debt protects a company for some years. Brookfield's corporate term debt of $14.4 billion has an average term to maturity of 15 years [27]. For a company like this, higher rates raise the interest cost only when old debt matures.

Companies: CPB, WYNN, CLX, SUGR, PCG, YUM, POOL, RELX, BN

Loans, demand and valuation

Higher rates also reduce demand that depends on loans. The 30-year mortgage rate rose to 7.40% on October 8, from 6.43% on July 2 [14]. ICE's mortgage technology revenue grew 5% in the second quarter of 2026, to $557 million, because more loans started [28]. Of that revenue, origination technology gave $197 million and servicing software gave $226 million [28]. Servicing software earns money on loans that already exist, so it is less sensitive to rates. Pool sells to owners who often pay for a new pool with a loan (my reading).

Steady payers lose value when bond yields rise, because investors compare their cash with the yield on bonds. McDonald's fell 11.2% and PepsiCo 10.7% from August 28 to October 9 [17]. Procter & Gamble rose 5.2% in the same weeks [17], so the effect is different for each company.

Few picks gain. Schwab earns interest on client cash. Its own model says that a rise of 1 point in rates adds 3.6% to its net interest revenue over 12 months, and a fall of 1 point removes 1.6% [29]. Its stock fell 12.2% in these weeks [17]. The gain is small, and higher long yields also increase the unrealized loss on its securities, which was $10.6 billion at June 30 and reduces its capital ratio [29]. Copart earned $182 million of net interest income in fiscal 2026 on about $4.5 billion of cash and securities [30]. The largest gains in these weeks came from AI companies: Marvell rose 27.1%, Meta 24.3% and Synopsys 15.2% [17]. Their own earnings news was stronger than the effect of rates (my reading).

Companies: ICE, POOL, MCD, PEP, PG, SCHW, CPRT, MRVL, META, SNPS

How long the high rates can last

Some people say that the high rates will not last, because the war with Iran causes most of the inflation. The war started on February 28, 2026, when the United States and Israel struck Iran. Oil shipments through the Strait of Hormuz fell, and a ceasefire in April did not hold. In October, CFR calls the conflict "worsening" [35].

The data supports part of this view. A barrel of WTI oil cost $64.51 on average in February 2026 and $97.31 in September [36]. Energy prices in the CPI rose about 16% in the 12 months to August. Headline CPI rose about 3.4%, and CPI without food and energy rose about 2.4% (my arithmetic on the indexes) [3][32][33]. Energy causes most of the gap between these two numbers. The Fed agrees that it cannot control oil prices. Chair Warsh said: "We cannot affect any individual price, whether it be oil prices" [10]. In September, Governor Waller said that he does not see energy prices and tariffs "as a significant source of ongoing inflation pressure" [38].

Other data shows inflation outside energy. The core PCE index rose 3.0% in the 12 months to August [34]. The Minneapolis Fed estimates that core PCE inflation would be about 1 percentage point above the 2% target even without tariffs [39]. Governor Cook said that "new and more broadly based price pressures" can come when inflation in the AI sector becomes slower [40]. The minutes say that inflation "could prove to be more persistent than the staff anticipated", and the staff expect inflation to reach 2% only in 2029 [4].

The war affects the two parts of the 10-year rise differently. A higher expected path for short rates gave 0.33 points of the rise after June 30 [9]. This part follows the Fed, and the Fed follows inflation. If a peace deal lowers oil prices, headline inflation falls, and the Fed can stop its rises. I expect most of this part to reverse in that case (my estimate). The term premium gave 0.41 points [9]. Geopolitics is one of its causes, but the minutes also name AI borrowing, and the deficit is large [4][11]. A peace deal does not change these. Investors also expect the war to raise inflation only for a short time. The market's expected inflation rate for the five years that start in 2031 was 2.32% on October 9, near its 2.25% average of October 2025 [37].

If all of the expected-rate part reversed and the term premium stayed, the 10-year yield would be about 4.9% (my arithmetic on the model) [9]. That is still above the 4.1% to 4.4% of late 2025 and early 2026 [6]. For the picks, a peace deal would help the steady payers and the borrowers only a little. Debt that resets in 2027 still costs more than the old debt it replaces, as Wynn's new 6.875% notes show [20].

Companies: WYNN

What to watch

The Fed meets on October 27 and 28, 2026 [4]. On October 2, fed funds futures gave a 79.5% chance of no change in October and a 66.2% chance of a rise in December, according to a press report of CME FedWatch [31]. The September consumer price report comes before that meeting. Treasury gives its next refunding statement on November 4 [12]. Talks with Iran and the flow of oil through Hormuz decide the energy part of inflation [35]. A larger auction size would push the term premium up (my reading).

The weak borrowers report soon. Wynn and Clorox report in early November, and Campbell's in early December. Their dates are estimates on this site. Pool's swaps end on February 26, 2027 [25]. Yum's 91-day test on its June 2027 notes falls in about March 2027 (my arithmetic) [24]. Each refinancing shows the new cost of debt for these companies.

The AI buildout is the link to my earlier thought on who pays for it. If the hyperscalers borrow less, one force behind the term premium becomes weaker [4][10].

Companies: WYNN, CLX, CPB, POOL, YUM

My current view

I expect the 10-year yield to stay near or above 5% into 2027. Inflation is above the Fed's goal, the Fed expects to raise its rate again, the deficit is large, and AI companies borrow large amounts. Each of these supports a higher term premium. A peace deal with Iran would lower oil prices and the Fed part of the rise, but I expect the term premium to stay. A slowdown in AI borrowing would change this view more.

At these rates, the main risk is to the borrowers: Campbell's, Wynn, Clorox, Sucro and PG&E, and Pool and Yum because their debt resets soon. The second risk is to demand that depends on loans, such as new pools and the origination part of ICE. The steady payers, such as McDonald's and PepsiCo, lose some value but keep their cash flow. Companies with net cash, such as Copart, feel the least.

This is a mental model to test. It is information only and gives no advice to buy or sell.