Global bond yields have surged in recent months as investors struggle with persistent inflation, higher energy prices, geopolitical uncertainty, and concerns over government borrowings. The US 10-year Treasury yield reached 5.34% on 1 October 2026, its highest level since 2002.

Around the world, other government bonds have also reached multi-decade highs, such as UK, France, Japan, and more.

At home, the 10Y Malaysian Government Securities (MGS) yields have recently climbed to a high of 4.19% before easing back to 3.89%.

Many countries around the world have started to raise interest rates to combat high inflation, but locally BNM is still maintaining our OPR at 2.75%.

This rising interest environment at its core lead to multiple headwinds for equities. Companies that have strong moats and positive prospects will likely still continue to do well, but many companies in the market will likely experience a challenging business environment and potential de-rating catalysts.

Which was why I shared about this ETF that can benefit from higher interest rates as well as potential market corrections: https://www.doitduit.com/p/how-to-prepare-for-a-market-crash

Companies that rely a lot on debt for their business will find their costs increasing, while companies with a lot of cash on their books may be able to get some additional profit from their interest income.

Why does higher bond yields and interest rates negatively impact businesses and equities?

Briefly, I would say there are 3 main negative impacts for equities in a high interest rate environment.

(1) The direct impact is increasing the cost of borrowings. Many companies utilize some form of debt to grow their business, CAPEX, or for daily business operations. Higher borrowing costs directly impact P&L negatively, making companies report lower profits, leading to lower price.

• For example, let’s say a company makes RM100mil in profit and is valued at PE15. This would give it a theoretical market cap of about RM1.5bil.

• Now, with the rising interest rate environment, their borrowing costs increase and the profit outlook or forecast drops to RM90 mil. In this case, if the valuation remains the same, its market cap would drop to about RM1.35bil. However, if the market compresses its valuation because of its poor earnings outlook and only values the company at PE8, the market cap would drop to about RM720mil, or more than 50% down.

(2) A second order impact of higher borrowing costs is a slowdown of business. As projects require higher returns to justify the CAPEX, fewer projects would pass the hurdle rate and would be postponed or cancelled. This affects the whole supply chain as lower demand from one end will lead to lower demand for the whole network.

(3) Finally, higher interest rates or government bond yields would lead to a higher risk premium demand for income-focused equities.

• For example, previously I mentioned that plantation stocks tend to be valued based on their DY rather than profits, with most plantations’ fair value DY tending to fall around the 6-8% range to account for risk premiums. https://www.doitduit.com/p/why-invest-in-the-plantations-of-malaysia-a-formerly-highly-sought-after-sector-now-shunned-by-every

Now, if a government bond can give you over 5% yield, why would you buy a plantation giving only 6% yield? Investors would then demand higher yields in exchange for taking equity risk.

So, the share prices of income-focused equities would tend to drop as well, so that its DY would rise high enough to be attractive again. This includes blue chips, REITs, and other stable, dividend-paying businesses as well.

However, the market pendulum tends to swing in extremes in both periods of euphoria as well as depression. And now that many stocks in Malaysia are at their multi-year lows, there could be some opportunities here.

Setting the screen

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