The Bond Market Sell-Off Is Appearing in Earnings Reports

In this episode of Motley Fool Hidden Gems Investing, Motley Fool contributors Tyler Crowe, Lou Whiteman, and Matt Frankel discuss

The sell-off in bonds and its effect on stocks.

Why AI companies are getting caught up in the bond market moves.

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This podcast was recorded on Aug. 18, 2026.

Tyler Crowe: The bond market is talking a lot louder. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe. Today, I'm joined by longtime Fool contributors, Lou Whiteman, Matt Frankel. Earnings season is still happening, we're winding now, we're going to cover a couple earnings reports today from Klarna and Home Depot. But before we do, guys, the bond market is moving a lot more than it normally is, and it's moving in a direction that most people aren't a big fan of right now. Bond yields are the dividend yield, basically, of a bond or how much it's valued is rising, which basically means that people are not as willing to pay as much for bonds.

This isn't just happening in the U.S. either. Yields on government debt in many countries are hitting 20 year highs right about 2007 numbers, which when people hear that number 2007, a lot of alarm bells start to go off because we all remember what happened in 2008 through 2009, when we had high bond yields and the mortgage market started to do things that we didn't want it to do, and of course, we got the Great Recession. Not saying that that is happening now, but we are seeing some of the highest yields we have seen in a long time. Guys, what is going on? Why is this all happening at once?

Matt Frankel: Last time the 30-year treasury was this high, you said, Lehman Brothers was still one of the largest Wall Street firms. It's been a little while. If I'm a retiree, and I need to shift some of my portfolio to fixed income, I'm loving this, but for most of us, it's not a great thing. This isn't the Fed's doing. The long-dated end of the yield curve, meaning the 30-year treasuries, it's primarily market-driven. Remember, in 2023, when the Fed rapidly raised interest rates to combat inflation and short-term interest rates spiked over 5%, the 30-year yield was actually lower then than it is now. If investors expect rates to stay higher for longer, if there's added uncertainty, let's say, a Fed Chair who doesn't believe in forward guidance just for one example. If debt issuance is unusually high, like a combination of a lot of government borrowing and a surge in corporate debt, it can push long-term interest rates higher. You're right that this is global; this is not just a U.S. issue. Japan's tenure is at its highest yield since 1996. U.K.'s 30-year bond is approaching a 6% yield, I could go on. Investors expect more compensation on top of inflation to hold long term bonds because there is simply more supply to go around.

Lou Whiteman: Matt's right, this is not the Fed's doing, but it's also the Fed's doing, which is a problem here; there are two things going on. First, the market is looking around the industrial world and seeing no end to budget deficits. What's happening in the U.S., it's happening in Europe, higher debt means more risk. Investors are asking to be compensated for the added risk, that's how the bond market works. But secondly, and this is where the Fed comes in, there is this lingering worry about political independence of the Fed and the Fed's ability to act if needed to raise rates and combat inflation. I hope those fears are overstated, but I think they are justified, and until the Fed proves otherwise, it is in the penalty box with investors. The credibility of the Fed is probably its best tool for keeping rates down or to at least tamper rate expectations. To the extent that it is not credible right now or less credible than it was, that's a big thing driving the 30-year in the U.S. Around the world, there's country-specific issues going on everywhere, but got to remember, this is a global competition for funds. If the Fed is paying more, it forces competition, it forces everybody else to pay a little more because they all want to attract flows. Couple that with what's going on in corporate, styler, which I think we'll get to next. There's just a lot of people battling for bond funds right now, and that is causing rates to go up to try and entice people to choose them.

Tyler Crowe: For those of you who are Motley Fool members, maybe this is just the pitch to becoming a member, the three of us actually did a live Q&A yesterday where we were talking about this, too, with the supply and demand of debt in general is way up. With that much extra supply, obviously, the people who are buying it get to be a little bit more choosy, what do you call it, the buyer's market, if you will. I feel like we have to ring a bell because we're going to bring in AI here because part of that, as you were saying, Lou, the corporate issuance part is in large part because of all this AI data center spend, and most directly magnificent seven and a lot of these hyperscale companies. We wouldn't normally bring them up in a conversation about debt and bond yields for years, because they were massive free cash flow businesses. They didn't need debt; they were sitting on massive piles of cash to the point where people were like, why don't you guys do something with it? Like, pay a dividend or something, but now we're at this point, capex for spending for AI is leading to significant added debt, also using equity, and also using things both on and off the balance sheet to make a lot of this spending happen.

Where do you think as we think about AI build-out and the corporate issuance stuff? Obviously, it means that the cost of capital is going up. Where do you think this increase in capital will actually start to show up in this trajectory of AI build-out? Because we've watched the capex guidance for these Mag 7 companies, they'll just raise guidance and just brush their shoulders off, it's fine we'll just do. Where do we actually see it start to bite?

Matt Frankel: Like you just mentioned, it wasn't that long ago, within the past couple of years, that most investors thought the AI buildout would be entirely funded by the cash flow these companies generate and the cash they had sitting on their balance sheet, like you said. But that's not happening; the numbers got too big. Hyperscaler capex is on pace to reach $750 billion this year. Estimates are calling for about $1.2 trillion next year, trillion with a T. Debt funding is about one-third of that 750 billion this year, and it's likely to be an even greater percentage of that higher number next year. For example, Goldman Sachs is forecasting 35% of that 1.2 trillion will be debt-funded. There's also that off-balance sheet part of the discussion, like you mentioned. The hyperscalars now have about $1.65 trillion of what we would call off balance sheet debt. This is things like lease commitments, which it's definitely a part of the AI revolution. JV structures they have on their balance sheet, things like that. That figure has 8x since 2022. The debt from hyperscalers, and we talked about this in the first section, competes with treasuries for investor dollars. When you have a surplus of just long-term debt instruments, it can help push yields higher, and we're already seeing that. We're seeing wider credit spreads on hyperscaler debt, just to name one example, so we're already seeing this show up.

Lou Whiteman: Tyler answered your question on when the increase will show up; it already has shown up. Alphabet just reported its first quarter of negative free cash flow since going public more than a decade ago. The question, I think, isn't when it'll show up. The question is, when it will stop? The only answer we have is not soon. One of the things hanging over the market is that we don't know to answer that question. Arguably, the corporates have more of an ability to manage higher rates than a lot of these sovereigns do, and I think that's reflected in rates. Look, they're not trading at U.S. standards, but they're trading pretty close. Something has to give eventually. But at the same time, that eventually can be a long ways away. It's not a crisis right now, it's a crowding. I don't get the sense that bond buyers are anywhere near going on strike, so we can manage this. What we have to worry about is when that day comes where suddenly there is a bond-buying strike, and what we do then, it's lingering out there. It's a threat, it's not there yet, but it's something we have to watch.

Tyler Crowe: I think one of the interesting thing that's going to be to follow is what changes the dynamic here? Because we've seen this all happening worldwide all at once, and very curious what to see how this transitions and how it's able to move from this rising interest rate into something either flat lining or starting to go back down to levels that we've seen previously. But after the break, we're actually going to talk about two companies that have pretty direct exposure to what's happening to rising rates. I'm going to start with up there.

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Tyler Crowe: Like I said, there's not as many earnings going on as late, but there still are some pretty exciting earnings stories going on right now, and here's Klarna Group. I actually had to check this while we're recording because I think it's changed almost two or three percentage points since we started recording, but the stock's down about 21% as we're recording right now after the company reported earnings. There was also some management changes that are going to be happening, a little bit of transition in the C suite. A lot of stuff is happening, Matt. What was in the earnings report? What was in it that actually sent the shares down 20%? Now, we've seen a lot of 15, 20% moves this year. This quarter specifically related to earnings. Is this just another one of those? Big move at the earnings, we'll see what happens after a couple of days.

Matt Frankel: Feel like companies getting beaten down after mostly solid earnings has become a pretty recurring theme this quarter, but Klarna is actually pretty explainable here. For the most part, their quarter was excellent, 27% year over year revenue growth, transaction margin dollars, which is a key metric of theirs, that was up 42%. They posted a net profit versus a net loss a year ago. Their merchant base, meaning the number of merchants that use Klarna, grew by 54%, and their credit quality actually improved. That was a big concern, if you remember a few quarters ago. But like many companies, the real story here is a guidance cut, and it was a substantial one. Klarna lowered its full-year revenue guidance. They blamed currency headwinds, and more significantly, they blamed reduced expectations from Germany, which is their number one market by volume. Plus, they announced some big management changes. There's the CFO, and there's the chief marketing officer, both of whom have been with the company for a long time, are stepping down early next year. Forward-looking softness can crush a stock, even when the backward-looking numbers look great, and that's definitely what's happening here.