By Christopher Combs, Chief Investment Officer, Silicon Valley Capital Partners
Many investors hear financial commentators say that “rising Treasury yields are bad for duration assets.” While the phrase sounds complicated, the concept is actually quite simple.
Understanding how duration assets are valued can help investors better understand why stocks sometimes decline when interest rates rise.
- What Is a Duration Asset?
A duration asset is simply an investment whose value depends heavily on cash flows that are expected far into the future.
Examples include:
- High-growth technology companies
- Software companies
- Artificial intelligence companies
- Long-term bonds
- Real estate investments with long-dated cash flows
For example, a mature utility company may generate most of its profits today. In contrast, a rapidly growing AI company may be expected to generate much larger profits five, ten, or even fifteen years from now.
The farther away the expected cash flows are, the greater the asset’s duration.
Think of duration as a measure of how much an investment depends on the future.
- Why Interest Rates Matter
Investors do not value a company based solely on future profits. Instead, they calculate what those future profits are worth in today’s dollars.
This process is called discounting.
For example:
- Receiving $100 today is worth exactly $100.
- Receiving $100 ten years from now is worth less than $100 today because you must wait ten years to receive it.
The interest rate used to calculate today’s value is called the discount rate.
When the 10-year Treasury yield rises, discount rates throughout the financial system generally rise as well.
As discount rates rise, future profits become worth less in today’s dollars.
The result is lower valuations for duration assets.
- Why Markets React So Quickly
The market often reacts more to changes in interest rates than to the actual level of interest rates.
Imagine a company expected to earn most of its profits ten years from now.
If the discount rate rises from 4% to 5%, the present value of those future profits can decline significantly.
Nothing about the company’s products changed.
Nothing about management changed.
Nothing about customer demand changed.
The only thing that changed was the interest rate investors use to calculate today’s value of those future cash flows.
This is why fast-rising Treasury yields can cause temporary pressure on growth stocks, technology stocks, and other duration-sensitive investments.
The Important Offset: Stronger Growth
The good news is that Treasury yields often rise because the economy is growing faster than expected.
A stronger economy can lead to:
- Higher corporate revenues
- Higher earnings
- Greater business investment
- Increased productivity
Over time, stronger earnings can offset some or all of the valuation pressure caused by higher interest rates.
This is why investors must evaluate both sides of the equation:
- Rising rates can lower valuations.
- Stronger economic growth can increase earnings.
The long-term outcome depends on which force is stronger.
Conclusion
Duration assets derive much of their value from cash flows expected far into the future. Because those future cash flows are discounted using prevailing interest rates, rising Treasury yields generally reduce their present value.
This explains why growth stocks, technology companies, and long-duration assets often experience volatility when the 10-year Treasury yield moves sharply higher.
However, rising yields are not always a sign of trouble. In many cases, they reflect stronger economic growth, stronger employment, and stronger earnings potential—factors that can ultimately support higher asset prices over time.