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.
• Klarna's earnings.
• Home Depot's earnings.

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A full transcript is below.

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.

Lou Whiteman: This is pretty simple. When you're trading at 20 times expected, revenue, and we can as Matt said, they move to a profit, so we can give them a forward PE here a little 85 or so times forward earnings. When you're treating at these levels, the market wants perfection. Yes, perhaps a sell-off seems odd with decent numbers, but we're in a situation where decent isn't good enough, and that's what we're seeing in the reaction.

Tyler Crowe: I have to imagine, too, when you're seeing softer guidance in conjunction with two of the people who are largely probably responsible for creating such guidance, the CFO and Chief Marketing Officer, all talking about transitioning. You can definitely see why the market might be a little bit more spooked than normal. Look, Klarna is a financial services company, and I have to imagine that some of what we're talking about here in the bond market up in the first segment, where we have rising interest rate, the private market, we're starting to see higher rates of default or write downs on private credit. There is creeks in the credit-debit finance environment, which I think just adds to the piling on, I guess, if you will, for all of this. Considering this, like what we saw, softer guidance, what we saw with rising interest rates, cost of capital, because Klarna does have deposits, which does mean, you got to fight for that capital. What can we expect from Klarna? Is this the trend that we're going to see for a while now or is there perhaps some turnaround?

Matt Frankel: On one hand, Klarna funds its business, at least 90% of its lending business, with low-cost deposits, so that's a nice competitive advantage. Klarna is a bank, unlike some of its competitors. But we're in a higher for longer rate environment, and the longer we go, the longer it seems like that's the case, and that leads to a stretch consumer. For a company that relies on payment volume and fees from people buying things, that's definitely a problem. To tie it into your global bond question from earlier, their guidance reduction, as I mentioned, was mainly tied specifically to expected softer consumer spending in Germany. Mentioned European bond yields are at multi-decade highs in a lot of cases. Of course, the effects of this are not Klarna-specific. This is nothing the company's doing wrong. The company's credit metrics moved in the right direction, but it's definitely, they're being affected by this environment.

Lou Whiteman: This is a macro concern, not Klarna's ability to fund itself, but on the subject of Klarna, and here's the thing. We never really fully know about a new fintech business, a new lending business, until it has weathered a full cycle. Everything else is just modeling, and the models tend to get things wrong. The market is focused on the near term, it's focused on things going wrong from here with the consumer. I think that's appropriate, but as a long-term investor, I can't just whistle past this because we really don't know yet. There's a chance that Klarna proves itself out in a recession here, and we find out, yes, their models work, and this is a business that can weather an entire credit cycle. There's a chance that we'll learn that they can't, and as a long-term focused investor, I just need to accept that risk and accept that just we don't know, and there's no way to know until they go through it. If you choose to buy in here, and back to my earlier point, when you were paying a high valuation for that uncertainty, I'm probably not surprised that there's at least some weakness or at least some lack of eagerness to jump in now and buy this.

Tyler Crowe: You say the market doesn't love uncertainty, but it seems to like it when it's a bull market, but when the bear market comes, all of a sudden everyone's afraid of uncertainty. But speaking of a company that has definitely weathered the cycles up and down for quite a while, we're going to talk about Home Depot’s, anything? I guess you could say it's the continuing theme of the day where we're talking about companies that are very much influenced by what's happening in the macro environment. I think Home Depot is definitely in that realm, they reported earnings stay. Shares are only up about 0.4% today, so it's a little bit of a nothing burger reaction from Wall Street. Market's down so maybe you could say, hey, they're up while the market's down, so putting a positive spin on it. Lou, what was in the report that might have people a little optimistic or maybe just a little bit of beating expectations, but the long term trend stays the same with Home Depot.

Lou Whiteman: Period. They didn't break, they didn't do anything too impressive, but they held serve, they beat on the top and bottom line despite operating in what management called a frozen housing market. That's not great to hear, but look, again, they did OK. Looking under the hood, there's a lot going on. Comp store sales only up 1.7%, which looked a lot like price increases and not volume increases. We would like to see volumes growing. Also, the company received $730 million in tariff refunds in the quarter, which helped offset pressure on higher-than-planned fuel, higher-than-planned energy, and product input costs. Management said it expects the higher cost to fully offset the tariff benefit. The macro net is negative right now. They are basically saying that we can't just count on tariff refunds to cover our higher costs forever. Home Depot has gone nowhere over the last five years; the stock is up just 5%. To be honest, that's pretty great, that's pretty amazing that it's held up as it has, considering everything going on in the housing market. The company has lots of levers to pull, and I think investors have baked in that the issues are macro, the issues aren't Home Depot-specific, and that Home Depot will get through the cycle. I think it's pretty impressive how patient the market has been and tolerant of underwhelming numbers, but at some point, we would like to see acceleration here, I don't know when that's going to happen.

Matt Frankel: Beating expectations in a frozen housing market, it's certainly impressive, and it really shows Home Depot's resilience, compared to some other real estate plays, which we'll get to in a minute. The comp store sales growth, Lou mentioned it was 1.7%. That's not a knock-your-socks-off number, but it does represent an acceleration over the previous quarter, which, in a frozen housing market, is pretty nice. The company also reported a higher average ticket, meaning, like the average sale they're making went up significantly, and the big projects which are often funded through home equity, like a full kitchen renovation, for example, those are still mostly on hold. That's what's been holding their business back, really, for the past four years. But the larger average ticket, it does show that smaller projects, at least, are making a pretty nice comeback here, so that's really nice to see.

Tyler Crowe: The only thing I would nitpick here, too, though, is comps at 1.7. It sounds good, and it's accelerating, but it's also below inflation right now, so it's not exactly keeping up. Certainly, we need to follow up on as we watch the Home Depot story. I want to tie this back to our theme on bond yields, the macro environment going on. Higher interest rates has basically kept that firm lit on housing, just like executives at Home Depot said, it's a frozen housing con. Does this make any like, can you be there. The home improvement companies, Home Depot, Lowe's or anything else housing or real estate related look attractive as like that bottom of the cycle type of investment, even if we're not necessarily at the bottom of the cycle here.

Lou Whiteman: As an investor, I am quite content to be late here. Home Depot said most of their business is being driven by small projects, not as Matt said, huge renovations and we got terrible housing numbers for July today. Single family housing starts fell by nearly 10%. We're close to November 2022 Lowe's here. Pending home sales came in at the second lowest level in history. Glass half full, we got to be close to a bottom when we get down to these levels. Glass half empty is we can just scrape along that bottom for a long time. There's no guarantee that that bottom is rubber, and we're just going to bounce off it. Given what we've talked about, given everything we're seeing right now, as I said, I'm very content to just wait and see signs of an actual rebound. My guess is that there is going to be a quick rebound, and I'll remain on the sidelines here.

Matt Frankel: I completely agree with what Lou just said, and this is coming from someone who's very long-term bullish on things like homebuilders and certain real estate adjacent stocks like rocket companies. The thing that makes these stocks look cheap, they might be at a cyclical bottom right now is the same thing that the bond market is telling us right now is not going away anytime soon in the higher rate environment. I mean, with Home Depot, specifically, there are bull and bear arguments to be made here. The lock-in effect, meaning that people are being stuck in their homes longer than they want to because of high mortgage rates, that's what's fueling that small project demand. People are making improvements to their home not moving, which is part of the resilience with this business. The company's beating expectations in frozen market conditions, it really shows how resilient this business is.

But I mean, like I said, while customers might be improving their existing homes, doing projects they had been putting off, the big projects are still largely on hold, and that's not going to go away. The bond markets telling us it's not going to go away anytime soon, so we'll have to wait and see on that. If we are early to a housing market thaw, it's like Lou said. He's perfectly content to be late to the party, and there's nothing wrong with that. A durable business like Home Depot or Lowe's could be a good way to play it at this stage. Be aware that you're getting a quality business, but it might be a little while until your thesis fully plays out.

Tyler Crowe: I would say as both an investor and also sitting on the energy and materials editing desk at The Motley Fool during the 2010s, a cyclical bottom can stay at the bottom for a long time. We saw it in oil and gas from 2014, all the way through 2020, we saw it in mining and materials all through the 2010, as the China slowdown thesis started to play out. If you are one of those investors who's I think we're at the bottom of the cycle, it's possible, but these cycles can remain way way longer than you might actually think it's possible. Always keep that in mind. Well, guys, this all the time we have for today. Matt, Lou, thanks for sharing your thoughts.

I'm going to disclosure, and we'll get out of here. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for our guests. Don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards, and is not approved by advertisers. Advertisements or sponsored content provide for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for producer Kristi Waterworth and the rest of The Motley Fool team. For Matt, Lou, and myself, thanks for listening, and we'll chat again soon.

Lou Whiteman has no position in any of the stocks mentioned. Matt Frankel, CFP® has positions in Klarna Group and has the following options: long January 2027 $15 calls on Klarna Group. Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Goldman Sachs Group, Home Depot, Klarna Group, and Meta Platforms. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.