Key points
- Other yields are measured as a spread over it.
- Driven by central bank policy, inflation expectations and long-term growth.
- All else equal, a higher risk-free rate lowers the value of shares and other assets.
Example
If the risk-free rate rises by 1 percentage point and the extra return investors want from shares stays the same, the discount rate rises by 1 point too, which lowers what investors will pay for future profits.
In history
The 10-year Treasury yield rose from about 1.6% in January 2022 to almost 5% in October 2023 as the Fed raised rates; the S&P 500's forward P/E fell from about 21x to about 17x by late 2022.
Related terms