(Bloomberg) -- Dealmakers, who were gearing up for a busy year of initial public offerings, have already been confronted by a formidable challenge: rising Treasury yields that could deflate enthusiasm for new listings.
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US IPO volume in 2025 was expected to return to prepandemic levels after stocks closed out the best two-year run since 1998, but equities face a bumpy road ahead as bond yields have climbed on concerns that the US economy is still too hot and the Federal Reserve is in no rush to lower interest rates.
“Rates are one of the key potential headwinds” for the IPO market, said Robert Stowe, head of Americas equity capital markets at Barclays Plc. “If there’s an impact on the equity market then there will be an impact on the IPO market.”
Last week’s blowout nonfarm payrolls report briefly pushed 30-year Treasury yields above 5% for the first time in more than a year. The swaps market is now pricing in that the Fed will only cut interest rates by one-quarter percentage point later this year.
Elevated bond yields will likely weigh on the valuations of the type of high-growth companies that are looking to sell stock for the first time, since their stock prices often hinge on profits that are expected in the years ahead. The pressure may give potential IPO candidates an incentive to hold off.
“It’s going to be hard to sell IPOs this year,” said Matthew Rowe, head of cross asset strategies at Nomura Capital Management. “Companies that need the money are going be forced to make a decision and it will likely be selling equity at a lower price.”
Firms that don’t need the money, Rowe says, “will probably just pull their IPOs.”
The stock market has long ignored rising yields, but the reaction to Friday’s jobs report may be a turning point. The S&P 500 tumbled 1.5% on the day, its worst session since mid-December.
To be sure, historically, the IPO market has been resilient to interest rates at these levels, and current conditions haven’t stopped firms like Venture Global Inc. from testing the waters. Treasury yields from 2004 to 2007 were around the same levels as they are today, but IPO activity remained strong.
“On an absolute basis, the market was extremely healthy and functioning in the mid-2000s when rates were high,” said Steve Parish, co-head of ICR Capital. “What investors don’t like is volatility.”