Hurdle rates: why a 19-year-high 10-year breaks them

September 26, 2026 · 5 min · Free, with full transcript

Consumer sentiment has fallen to a four-month low while the 10-year Treasury yield sits at a 19-year high. The episode asks whether those two readings change the hurdle rates and WACC sitting in your capital plan, and argues they do. The position: a discount rate set in March, when the 10-year was near 4.2 percent against north of 4.9 percent now, can overstate present value on a 10-year cash flow by 15 to 20 percent. You walk away with a trigger rule for rerunning numbers, the reason a Fed cut can coincide with a rising 10-year as it did in late 2024, and why weak University of Michigan sentiment hits both the numerator and the denominator, as seen in Target's cautious guidance.

Listen to the podcast

4 min

Chapters

Key takeaways

  • Reprice capital decisions off today's 10-year Treasury yield, not the assumption you set in March.
  • Do not treat a Fed policy cut as a promise of lower long yields; in late 2024 the 10-year rose roughly a full point after a cut.
  • Set a trigger: if the 10-year moves more than about 50 basis points from your assumption, rerun the marginal projects only.
  • Model weak consumer sentiment on both sides at once, since projected cash flows fall while the discount rate rises.
  • Pull every capital project approved in the first half of 2026 that sits within two percentage points of the hurdle rate and rerun it.
Read the full transcript

Host:This is Leaders Insights. On the table, consumer sentiments four month low and what it means for every hurdle rate on your desk.

Expert:The 10-year Treasury yield hit a 19-year high this week. And consumer sentiment just slid to a four month low. Two numbers, same message. And the message is that the discount rate you set in March is a fossil. The discount rate, the return you demand before a project is worth doing, moves with those yields and yours hasn't moved.

Host:Spell that out for someone who signed off on a warehouse expansion in April.

Expert:In April, plenty of CFOs were pricing capital off a 10-year around 4.2%. It's north of 4.9 now. On a 10-year cash flow, that swing can knock 15-20% off the present value. Your warehouse still gets built, but it earns less than the memo promised.

Host:So let me throw you the first thing everyone's saying. Belief number one, consumer sentiment is soft so the Fed will cut, so rates come down, so relax.

Expert:Wrong, and it's the expensive kind of wrong. People conflate the Fed's policy rate, the overnight rate for banks, with the 10-year yield, and those two can march in opposite directions. The University of Michigan Sentiment Index Dropping tells you households feel poorer because inflation won't quit. That same sticky inflation is exactly why long yields are climbing. The Fed can cut the front end, and the 10-year can still rise if bond buyers don't believe inflation's beaten.

Host:You're saying a cut could arrive, and your cost of capital gets worse anyway.

Expert:It happened in late 2024. The Fed cut, the 10-year went up roughly a full percentage point over the following months. Anyone who parked their models waiting for relief got mugged.

Host:Fine. Relief two, and this one's from the operators, not the finance crowd. Soft sentiment is a demand problem. It has nothing to do with my hurdle rate. Those are separate conversations.

Expert:Half true, and the half people miss is the dangerous half. Yes, sentiment hitting a four-month low is a revenue signal. Weaker demand, longer sales cycles, more discounting, but it also feeds the denominator. If your top line assumptions were built for a confident consumer, and that consumer is now clutching the wallet, your projected cash flows drop while your discount rate climbs. Both blades of the scissors close at once.

Host:Give me a name.

Expert:Look at Target's guidance this year, soft discretionary spend, cautious households. A retailer like that is revisiting store remodel returns, not because rates alone moved, but because the shopper walking in spends less. You can't treat the two inputs as living in different spreadsheets. The project either clears both tests, or it doesn't clear.

Host:Last one, and this is the comfortable one. Our weighted average cost of capital is set once a year by Treasury. It's a policy number. We don't chase the tape.

Expert:Wrong, and it's laziness dressed up as discipline. The weighted average cost of capital, the blended cost of your debt and equity, is not a commandment carved in January. When the risk-free rate moves 90 basis points, a basis point being one-hundredth of a percent, and you're still discounting at last year's number, you're not being stable, you're being asleep. I've seen boards approve deals at a stale 8% hurdle when the honest number was closer to 9.5. That gap is where value quietly dies.

Host:But if you recut the WACC every time the bond market sneezes, don't you paralyze the whole capital plan?

Expert:You don't chase every tick. You set a trigger. If the 10-year moves more than, say, 50 basis points from your assumption, you rerun the marginal projects, the ones sitting right at the hurdle. The infrastructure you'd build regardless doesn't need relitigating. The borderline ones do. And right now, half your borderline list is underwater, and nobody's told you.

Host:So what does the CFO do Monday morning?

Expert:Pull every capital project approved in the first half of 2026, find the ones within two percentage points of your hurdle rate, and rerun them at today's 10-year, not marches. The winners survive. The zombies get killed before they eat your budget.

Host:Kill the zombies before payroll. That'll do it. What we read for this one. Financial Times CNBC Finance Accounting Today CFO Dive. We'll leave it there. The CFO self-assessment at MBA-training.com will tell you where you really stand.

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