The Moody’s downgrade of U.S. credit on Friday sent shockwaves through markets, driving 30-year Treasury yields to 5% — a level unseen since October 2023 — reviving fears about debt sustainability and putting downward pressure on equity valuations across the board.

Moody’s decision marks the third U.S. credit rating downgrade since 2011, following S&P’s move in 2011 and Fitch’s in 2023.

How Higher Treasury Yields Hurt Stock Markets

Higher yields ripple across the entire financial system, raising borrowing costs and changing how investors value stocks.

There are at least five channels via which higher Treasury yields pressure markets:

1. Bond Prices Fall, Increasing Market Volatility: As yields rise, prices of existing bonds drop — hurting current bondholders and increasing volatility. Rising Treasury yields also ripple through markets as a broad signal of tightening financial conditions.

2. Cost Of Capital Increases: Treasury yields serve as a benchmark for other forms of debt. When they rise, companies — especially those already heavily indebted — must pay more to borrow from investors. That slows investment, expansion and profitability, particularly for heavily leveraged firms.

3. Earnings Yield Becomes Less Competitive: As of mid-May, the S&P 500 earnings yield stood at 3.5%, trailing the 10-year Treasury yield by a full percentage point. This reverses the typical risk-return tradeoff, making “risk-free” government bonds more attractive than equities — and increasing the likelihood of investors shifting capital away from stocks.