Higher bond yields, even after the U.S. Treasury's pledge to buy back some longer-dated debt, could make the stock market more vulnerable to any coming shocks. Bond yields were higher Thursday, erasing the brief decline that followed Treasury Secretary Scott Bessent's announcement Wednesday that the department will more than double the size of its government debt repurchases. Bessent told CNBC Thursday that the debt buyback program could exceed the $4 billion upper limit referenced the day before. The change is set to start Sept. 9 and run through Nov. 4. On Thursday, the yield on the 30-year Treasury bond, which more closely reflects concerns around the U.S. deficit than do shorter-dated bills and notes, climbed above 5.23%. The yield on the 2-year Treasury note, which tracks inflation worries, rose to 4.20%. Yet the stock market reaction has been generally muted, despite global bond yields climbing to multidecade highs.
Higher borrowing costs will also hurt corporate bottom lines, coming at a critical time for businesses that are spending freely to build out artificial intelligence infrastructure. More expensive capital will likely hurt free cash flow and profit margins over time. That's a key reason why Alphabet shares tumbled after it reported its latest earnings. The Google parent posted negative free cash flow for the first time since going public in 2004.
Higher yields could also spur companies to seek alternative sources of funding. Jessica Inskip, director of investor research at StockBrokers.com, said businesses could be encouraged to sell equity, for example, as opposed to debt, to raise capital. Any resulting dilution of shareholders could also weigh on the stock market.
