Bond yields are one of the most important variables for equity markets because they effectively determine the “risk free” return available to investors US 10Y yield is currently ~5.25% Why does this matter for equities? If an investor can earn ~5.25% from a US government bond, equities need to offer a meaningfully higher expected return to justify taking additional risk This directly impacts P/E multiples A simple way to understand it is through the inverse of the bond yield: At a 5.25% yield: 1 / 5.25% = ~19x You can think of this as a rough “P/E equivalent” or inverse yield multiple for bonds - 4% yield = ~25x - 5% yield = ~20x - 6% yield = ~16.7x Now suppose a stock trades at 25x P/E Its earnings yield is: 1 / 25 = 4% So when a risk free government bond itself offers ~5.25%, investors naturally demand a higher return from equities That is where the Equity Risk Premium comes in Equities carry risk & price volatility, so investors need to be compensated for taking that additional risk If bond yields rise while equity earnings yields remain unchanged, this risk premium gets squeezed. The market can adjust in two ways: Earnings rise, or stock prices fall & P/E multiples compress Of course, equities can grow earnings over time while bond coupons generally do not, so this is not a direct apples to apples comparison But the key point remains: Higher bond yields raise the hurdle rate for equities