Rising rates throw a spanner in investment bankers’ spreadsheets

By the Editorial Team · Friday, September 18, 2026

The climb of the 10-year U.S. Treasury yield to 5 percent is forcing investment bankers to reevaluate company valuations, as traditional discounted cash flow models suggest lower values amid rising discount rates. This shift complicates dealmaking and IPO planning because actual stock prices have remained relatively stable, defying the expected decline based on higher risk-free rates and equity risk premiums.

The recent surge in long-term Treasury yields is prompting a reassessment of company valuations among investment bankers, highlighting a disconnect between traditional financial models and actual market behavior. This week, the yield on the 10-year U.S. Treasury note climbed to 5 percent, marking only the second time since 2007 that it has reached this level. As a benchmark for the “risk-free” rate used in discounted cash flow (DCF) models, this rise has major implications for how investors calculate the cost of capital and, by extension, the fair value of companies.

The risk-free rate serves as a foundational input in determining the discount rate applied to future cash flows. When this rate increases, the present value of anticipated earnings tends to decrease, theoretically leading to lower company valuations. However, recent market trends have defied this expectation. Despite the rising yield, the S&P 500 index has exhibited relative stability, declining by only about 1 percent over the past month and registering a slight gain for the year. This resilience contrasts with historical patterns, where equities typically experience a decrease early in a tightening cycle—in this instance, marked by the Federal Reserve’s recent decision to raise interest rates for the first time in three years to address persistent inflation pressures.

Analysts at Goldman Sachs note that historically, the S&P 500 drops approximately 2 percentage points at the start of rate hikes, a pattern that has yet to fully materialize. With roughly 75 percent of the current index valuation reflecting cash flows expected more than ten years in the future, rising discount rates should, in theory, exert downward pressure on stock values.

In addition to the risk-free rate, the equity risk premium—a measure of the additional return investors require for holding stocks over risk-free debt—has also increased. Professor Aswath Damodaran of New York University, who regularly publishes estimates of this premium, reported a rise to just above 6 percent at the end of August, nearly a full percentage point higher than one year prior. A higher equity risk premium normally suggests that investors are demanding greater compensation for risk, which tends to depress stock prices.

Despite these theoretical underpinnings, the observed market prices have not aligned neatly with the signals from these valuation metrics. This divergence has created challenges for dealmakers and companies planning initial public offerings, who rely on communicating strong valuation assumptions to investors. Junior bankers constructing DCF models may find that their calculations yield lower valuations at odds with the steady or rising equity prices seen in practice, underscoring the complexities facing financial professionals in the current environment.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.