October 30, 2023
For investment banking recruiting, the cleanest way to read this market backdrop is simple: higher rates are no longer just a macro headline. They’re changing government budgets, equity valuations, housing affordability, M&A logic, and capital allocation in capital-intensive industries.
That’s useful because interviewers like candidates who can connect dots. Not in a vague “rates are up, stocks are down” way, but in a practical banker’s way: what happens to borrowing costs, consumer demand, valuation multiples, strategic M&A, and management guidance when the risk-free rate is suddenly much less friendly?
This week gives you several examples worth having ready: the U.S. 10-year Treasury reaching 5%, the S&P/TSX Composite hitting a new 52-week low, U.S. GDP surprising to the upside, Apple’s Foxconn exposure creating supply-chain risk, Chevron buying Hess for $53 billion in stock, and GM stepping back from a 400,000-EV production goal.
The 5% Treasury yield is the center of the story
The U.S. 10-year Treasury note yield reached 5%, a level not seen in 16 years. That matters because the 10-year rate sits underneath a lot of financial decision-making. When it rises quickly, almost every valuation and financing conversation changes.
Start with the government. Higher Treasury yields increase borrowing costs for the U.S. government, which can worsen the federal deficit and limit room for public spending. That issue is especially relevant because the U.S. reported a $1.7 trillion deficit, equal to 6.3% of GDP, with projections pointing to continued increases.
Compare that with Europe, where fiscal policy is moving in the other direction. Europe is set to reduce its combined deficits to 3.4% of GDP, and countries that were at the center of prior sovereign debt stress, including Greece, Portugal, and Ireland, are now moving toward smaller budget gaps. The contrast is striking: Europe, once viewed as the budget-risk problem child, is showing more fiscal discipline while the U.S. is still dealing with large deficits and political disagreement over tax increases and spending cuts.
For interviews, don’t treat that as trivia. It’s a sovereign credit and rates discussion. A country running larger deficits may need to issue more debt, and if investors demand higher yields, the cost of that debt rises. That can crowd out other spending and keep pressure on financial conditions.
Higher rates are also hitting equities and housing
Canada’s S&P/TSX Composite index closed below 19,000 for the first time in a year and ended the week at 18,737.39, down 378 points, or 1.98%, from the start of the week. The decline was tied to weakness in energy, utilities, and technology, plus uncertainty around interest rates.
That’s a good reminder that higher borrowing costs don’t hit every sector the same way. Utilities often carry meaningful debt and are sensitive to rate expectations. Technology valuations can be pressured when discount rates rise. Energy can move with commodity dynamics, but it still gets pulled into broader risk-off trading.
The same rate pressure is even more visible in housing. The average monthly cost of a new mortgage payment has risen to 52% higher than the average apartment rent. That gap has not been this wide since the 2008 housing crisis and has not been this pronounced since 1996.
Here’s the concrete example to remember: someone taking out a 30-year mortgage on a $430,000 home with a 10% down payment would face a monthly payment roughly 60% higher than if they had bought the same house three years earlier. That’s not a small affordability adjustment. That’s a demand shock.
But the housing market is not necessarily set up for a clean collapse in prices. About 80% of outstanding U.S. mortgages carry rates below 5%, which means many homeowners are locked into attractive financing. Selling and buying another home at current prices and current mortgage rates may not make sense. That can restrict supply even as new buyers struggle with affordability.
Interview framing: higher mortgage rates can hurt affordability and transaction volume without immediately forcing a major decline in home prices if existing owners are locked into low-rate mortgages.
Strong GDP growth complicates the rate narrative
The U.S. economy also delivered a strong growth number. Advance estimates showed third-quarter GDP growth of 4.9%, well above the prior quarter’s 2.1% and ahead of expectations of 4.3%.
Consumer spending drove much of that performance. Spending accelerated to 4% from 0.8% in the second quarter and added nearly 2.7 percentage points to overall GDP growth. Real wages also helped, rising 1.7% after adjusting for inflation.
That sounds bullish, but the recruiting answer needs nuance. Stronger growth can support corporate revenue and credit performance, but it can also make the Federal Reserve more comfortable keeping rates higher for longer. And there are already potential headwinds to consumer spending, including the resumption of student loan payments after a three-and-a-half-year pause.
So if someone asks whether strong GDP is “good for markets,” don’t give a one-word answer. Say it depends. Strong growth helps fundamentals, but if it reinforces higher-rate expectations, it can pressure valuations and financing conditions.
Apple and Foxconn show why supply-chain risk belongs in diligence
Apple’s China exposure remains a live strategic issue. Foxconn, a major Taiwanese contract manufacturer and key Apple supplier, came under scrutiny from Chinese authorities as its founder, Terry Gou, pursued a presidential run in Taiwan. That matters because Foxconn plays an integral role in Apple’s supply chain.
Apple CEO Tim Cook has been exploring alternative manufacturing hubs, which makes sense if potential disruptions at Foxconn could threaten production. Foxconn has historically operated across Taiwan and China and became the primary assembler of iPhones for Apple, with a substantial portion of its revenue originating from China.
There’s also an economic angle for China. Foxconn accounted for 3.5% of China’s exports in 2022, so actions that disrupt Foxconn could also create costs for China itself. That’s exactly the kind of interconnected risk bankers need to understand in cross-border M&A, equity research, and strategic advisory.
In diligence, this is not just “China risk.” It’s customer concentration, supplier concentration, geopolitical exposure, production continuity, and margin risk all bundled together.
Chevron-Hess is a scale and resource-access deal
Chevron agreed to acquire Hess in a $53 billion all-stock deal. The strategic rationale is clear: expand Chevron’s U.S. presence and gain exposure to Guyana’s oil discoveries through Hess’s stake in the Stabroek oil block, operated with Exxon Mobil and CNOOC.
The deal follows Exxon Mobil’s roughly $60 billion purchase of Pioneer Natural Resources, and together these transactions point to a major theme in energy: large producers are still willing to use their balance sheets and equity currency to increase oil and gas production.
For Chevron specifically, the Hess acquisition, along with prior purchases of PDC Energy and Noble Energy, is expected to increase daily oil and gas output to about 3.7 million barrels and expand shale production by 40%. Chevron also gets a 30% stake in the Stabroek block in Guyana. Chevron and Hess expect around $1 billion of cost synergies within a year, and the deal is expected to close by the second quarter of 2024, subject to review.
For banking interviews, focus on the structure and rationale. It’s all stock, which avoids a large cash outlay and lets Hess shareholders participate in the combined company. It’s also a bet on scale, production growth, and asset quality at a time when environmental concerns remain part of the debate around continued fossil fuel investment.
GM’s EV pullback is a capital allocation lesson
General Motors is abandoning its goal of building 400,000 electric vehicles by mid-2024. That’s notable because GM has been relying on EV technology as a major part of its future, while also anticipating a phaseout of gasoline-powered vehicles by 2035.
The move came despite GM reporting a healthy third-quarter profit, even as the UAW strike was costing the company about $200 million per week in profit. So the issue is not simply “GM is weak.” It’s more specific: EV demand, pricing, production targets, and capital spending are being reassessed in a tougher rate environment.
Other automakers have shown similar caution. Ford pushed back its EV production target in July, and Tesla has cut prices on popular vehicles including the Model Y and Model 3. Concerns have also grown over whether buyers are willing to pay a premium for EVs. Rising interest rates and reduced excitement around EVs were cited as contributors to the slowdown, though GM still says it remains committed to an all-electric future.
This is a useful answer if you get asked about industrials, autos, or growth capex. Higher rates raise financing costs for consumers and companies. If consumers are less willing to pay premium prices, and companies are spending heavily to scale production, management teams may slow the ramp even if the long-term strategy stays intact.
How I’d use this in an interview
If you want a tight market update answer, use this structure:
- Rates: The U.S. 10-year Treasury hit 5%, increasing pressure on government borrowing costs, consumer loans, mortgages, and equity valuations.
- Growth: U.S. GDP grew 4.9% in the third quarter, driven by strong consumer spending, but that strength may be hard to sustain as student loan payments resume and rates stay high.
- Markets: The S&P/TSX Composite fell to a new 52-week low, with energy, utilities, and technology under pressure.
- M&A: Chevron’s $53 billion all-stock acquisition of Hess shows that strategic buyers still pursue scale and high-quality resources when the asset fit is compelling.
- Corporate strategy: GM’s EV production target reset shows how higher rates and demand uncertainty can force even well-capitalized companies to slow growth plans.
The bigger lesson is that cost of capital is not just a valuation input. It changes behavior. Governments borrow differently. Consumers delay purchases. Companies rethink capex. Strategic buyers use stock instead of cash. And management teams become more cautious with guidance.
That’s the level of connection interviewers want to hear. Not a memorized headline, but a banker’s explanation of how one macro variable flows through the financial statements, the transaction market, and corporate strategy.