The reason for placing US Treasury yields and the dollar next to the Nasdaq
Distinguish between the meanings of 2-year and 10-year Treasury yields, real interest rates, and dollar strength. Do not determine the direction of stock prices based solely on the fact that interest rates have risen.
Table of contents
Remember this first
First, 3 things to remember
- 1Policy rates and market-traded Treasury yields are different.
- 2Long-term interest rates reflect expectations for future short-term rates and compensation for term risk.
- 3Distinguish between the effect of a strong dollar on corporate earnings and the converted returns for Korean investors.
Treasury prices and yields move in opposite directions.
When the price of an existing bond with a fixed interest payment rises, the yield for a buyer purchasing at that price moves lower. When the price falls, the yield rises. You must verify whether a "rise in US Treasuries" refers to a rise in price or a rise in yield.
Hypothetically, if you buy a bond that pays 4 dollars annually for 80 dollars instead of 100 dollars, the simple interest yield changes from 4% to 5%. The actual yield to maturity is not the same as this simple ratio because it accounts for principal repayment and the remaining term.
The 2-year and 10-year notes do not contain the same information.
Short-term Treasury yields can be sensitive to near-term policy paths, while long-term yields reflect expectations for growth, inflation, policy, and risk compensation over a longer horizon. The New York Fed provides model data that decomposes Treasury yields into expected short-term rates and term premiums.
The term premium can be understood as compensation for the risks of holding a bond for a long period. It is not a fixed value that can be measured directly and varies depending on the estimation method. Do not assume that a rise in long-term rates is solely due to expectations of the Fed's next hike.
Distinguish inflation expectations from nominal interest rates.
Distinguishing between nominal interest rates and expected inflation makes it easier to consider the actual financial burden. In a simple approximation, if the nominal rate is 4% and expected inflation is 2%, the real interest rate is approximately 2%. The recently released past CPI and future expected inflation are not the same concept.
The yield spread between Treasury Inflation-Protected Securities (TIPS) and nominal Treasuries is a reference for reading expected inflation, but it cannot be viewed as a pure market inflation forecast because it includes liquidity and risk premiums. Do not compare by subtracting figures of different maturities.
Break down the causes of rising interest rates.
The following are possible economic interpretations. In actual events, these paths can overlap, and price reactions may vary.
| Status | Points to connect with stocks |
|---|---|
| Improvement in growth and productivity expectations | Check whether improvements in earnings outlooks offset the burden of the discount rate. |
| Inflationary pressure and tightening expectations | Higher discount rates and borrowing costs can become a burden. |
| Increase in compensation for long-term holding risk | Long-term funding costs can rise even without policy changes. |
| Falling interest rates and recession concerns | Even if the discount rate falls, earnings may decline and credit risks may increase. |
Corporate funding can dry up even if Treasury yields fall.
Corporate borrowing rates are not the same as Treasury yields. A credit spread, which is an additional rate for credit risk, may be applied. Due to economic instability, corporate credit spreads may rise even as Treasury yields fall.
Small companies with insufficient cash may find it harder to raise funds in this environment. Conversely, companies with large cash reserves may benefit from interest income due to high rates. Do not assume that all growth stocks are affected in the same way just because they share that label.
Dollar strength and my KRW returns are on different levels.
All else being equal, when the dollar strengthens, US companies with revenue in local currencies may see a decrease in the dollar-converted value of that revenue. Conversely, dollar-denominated import costs may decrease. The net effect depends on the currency of revenue and costs, as well as currency hedging.
For Korean investors, a rise in the KRW/USD exchange rate can act to increase the KRW-converted value of dollar assets. It can be a burden on corporate earnings while simultaneously helping the converted value for holders. The Dollar Index (DXY) and the KRW/USD exchange rate are not the same indicator.
You should not make such assumptions
“If the US 10-year yield falls, the Nasdaq must rise.”
Interest rates sometimes fall due to recession and declining profits. Beyond the discount rate, one must also look at earnings outlooks and credit risk.
Check what you have read.
- Have you distinguished between bond prices and interest rates?
- Did you compare the same maturity and time period?
- Have you considered the cause of the interest rate change?
- Have you separated corporate exchange rate exposure from individual converted returns?
Apply what you read to the actual screen
Try it on WAPE
Source and scope of verification
Reviewed · Version 1
- Treasury Term PremiaNew window
Federal Reserve Bank of New York · Verify 2026-10-20
Decomposition of government bond yields into expected short-term rates and term premiums · Premiums are model estimates, not directly observable values. - Monetary Policy: What Are Its Goals? How Does It Work?New window
Federal Reserve · Verify 2026-10-20
Transmission channels of monetary policy to borrowing costs, asset prices, exchange rates, consumption, and investment · The relationship between future policy expectations and long-term interest rates; this is not data for predicting the direction of specific indices - Discounting the futureNew window
Federal Reserve Bank of St. Louis · FRED Blog · Verify 2026-10-20
Formula for converting future amounts to present value. · Relationship between discount rates and present value; figures in the text are separate hypothetical calculations - More Irrational Exuberance? A Look at Stock PricesNew window
Federal Reserve Bank of St. Louis · Verify 2026-10-20
The relationship between dividends, growth expectations, required rates of return, and stock value under certain assumptions · Limitations of simple models. - Has the inflation risk premium fallen? Is it now negative?New window
Federal Reserve · FEDS Notes · Verify 2026-10-20
The difference between expected inflation and market-based inflation compensation indicators · Impact of risk and liquidity premiums.
This is educational material for observation and information comprehension. Hypothetical examples do not represent actual stocks or performance and do not provide buy or sell recommendations.