Why VC Investors and Startups Should Be Worried About the Bond Market
Rising interest rates keep investors away from risky assets, and recent volatility could stoke those fears
Last week’s surge in interest rates, sparked by President Donald Trump’s tariff moves, might end a recent uptick in venture capital investing.
Global VC deal value hit $126.3 billion in the first quarter, its highest level in nearly three years, according to data provider PitchBook. The rebound came as the Federal Reserve started cutting interest rates last year, putting the VC market on more stable ground. High interest rates tend to choke off VC investing, while lower rates can have the opposite effect.
The 10-year Treasury bond yield’s surge from about 4% 10 days ago to over 4.5% last week raises the specter of another VC drought, similar to the one that occurred in 2022, when rates jumped from 3% to nearly 4%.
For a longer-term view of the connection between interest rates and VC investing, look at the past decade, when falling 10-year Treasury bond yields set the stage for a more active tech dealmaking landscape. The yield on the 10-year Treasury bond reached a recent peak in the third quarter of 2018 and tumbled when Covid-19 hit, the economy stalled and the Fed slashed rates. The 10-year yield hit a trough of 0.65% in the second quarter of 2020, the average for the period.
A surge in VC dealmaking followed: Quarterly VC deal value swelled from roughly $79 billion in the second quarter of 2020 to a high of $211 billion in the last quarter of 2021, according to data from PitchBook.
That flipped when surging inflation prompted the Federal Reserve to jack up interest rates, cutting off funding for startups.
While volatility has died down since Trump retreated on tariffs, the market action last week was worrisome. Not only did the Treasury yields pop, meaning investors dumped the bonds, but the stock market fell too. Typically, when stocks tumble, investors turn to the safety of Treasurys. This time they also sold Treasury bonds, a sign they had lost confidence in the U.S. government’s policies.
Rates have fallen a bit this week, which should help money flow into risky assets. But other economic indicators are flashing yellow or in some cases red. Consumers are bracing for a weaker economy and surging prices, and economists surveyed by The Wall Street Journal have cut their expectations for growth while predicting higher unemployment and inflation.
None of those factors give investors confidence to make big bets on startups.