Rising Yields Are Killing This Group of Stocks

Rising bond yields can damage many industries and even the broader economy, as they set borrowing rates for many types of loans and can squeeze consumer spending and corporate profits alike. But if you’re a homebuilder, you’re really feeling the pinch right about now. Here’s why.

Yields on Treasury securities have been rising steadily this year, as bondholders have continued to sell their notes and bonds, sending prices down and yields, which move in the opposite direction, straight up. The 10-year yield hit 5.2% last week, up 1.26 percentage points from its level in late February, just before the war in the Persian Gulf began.

As a result, mortgage rates, which closely track the 10-year yield, have soared past 7% in recent weeks, the highest level in more than two years. That makes buying a home significantly more expensive and puts a real dent in homebuilders’ fortunes.

The iShares U.S. Home Construction ETF (ITB -0.34%) is down 9.9% in just the past month. And no wonder, as its biggest holdings have plummeted in recent weeks. D.R. Horton (DHI -0.66%) has fallen 7% over the past month, PulteGroup (PHM +0.05%) is down 9.8%, and Lennar (LEN +0.80%) has drooped 8.1%.

There’s no relief in sight for rising yields

It doesn’t appear that there is any relief in sight, either. Most bond market analysts attribute the rise in yields, at least in part, to soaring energy prices due to the Iran war.

Treasury Secretary Scott Bessent has said those higher prices are temporary and will recede quickly once the war is over. But others aren’t so sure. This month, Chevron CEO Mike Wirth told a conference that various mechanisms capable of moderating oil prices — including strategic reserves and commercial inventories among them — are now largely spent. He suggested that even a quick and unexpected end to the conflict with Iran wouldn’t likely bring prices down softly or quickly.

There’s also the growing mountain of U.S. debt, which recently topped $40 trillion. U.S. government bonds become less attractive to investors when the government’s issuance needs to ratchet up to fund government operations. Yet politicians in Washington have shown no signal whatsoever that they’re prepared to take measures to reduce annual deficits.

Finally, massive bond issuance by hyperscalers to fund their AI data center build-out is competing with Treasury securities for investor capital, sending bond yields higher still. That borrowing and spending by mega-tech companies doesn’t look like it will subside any time soon.

To be sure, 10-year treasury yields at this level are not unprecedented. In fact, many economists point to yields before the 2007-2008 to show that rising yields today are a reversion to the levels of that era.

But that will be cold comfort to homebuilders and their shareholders, who now have to struggle to sell houses when mortgage rates are more than double what they were just five years ago. As a result, homebuilders and related stocks, such as home improvement retailers, are not a great bet at the moment.