The 10-year Treasury yield rises from 4% to 5%. In one causal chain, connect that move to M&A and LBO deal volume.
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The answer
A rise in the 10-year from 4% to 5% pushes up the risk-free rate, which is the anchor for discount rates in a DCF, so higher discount rates lower the present value of future cash flows and depress valuations. At the same time, the cost of debt financing rises, making leveraged buyouts more expensive.
Sponsors underwrite to a levered return, so when the cost of debt climbs, either they have to pay lower entry multiples to hit that return, or the deals simply do not clear. That directly causes LBO deal volume to fall. On the strategic side, the same higher financing costs and the pressure on equity values from the de-rating dampen M&A appetite. The net effect is a clear decline in both M&A and LBO deal volume.
Yield curve: normal vs. inverted
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