Follow the Yield, Own the Cash Flow

Good Morning Ladies and Gentlemen

“Hyperscalers have already gone free cash flow negative.”

The Wall Street Journal

You know, Ladies and Gentlemen, I find it extremely difficult to invest on the basis of macroeconomic outlooks. I have found, time and again, that average macroeconomic scenarios fall far short of capturing the complexity of the subject matter. Added to this is the fact that an unforeseen political or economic event can throw macroeconomic scenarios into disarray. That is why, in our clients’ portfolios, I try to make sound investments in companies that can generate positive cash flows even in difficult times and, above all, over the course of the economic- and investment cycle.
And yet, this edition of “Stefan’s Weekly” tries to make sense of an increasingly difficult macroeconomic environment, particularly interest rate rises and what we can learn from them, including some blunt, well-known correlations.

U.S. Treasuries I

Please excuse me, Ladies and Gentlemen, for returning once again to the subject of U.S. Treasury yields. Yet I remain convinced that the move of 10-year Treasury yields above 5%, a level last observed more than two decades ago, represents one of the most consequential developments in global capital markets today. What makes the recent rise particularly noteworthy is that it has occurred despite relatively well-anchored inflation expectations. The driving force, in my view, is not inflation but an increasingly intense competition for capital. On the one hand, the U.S. Treasury is accumulating debt at an extraordinary pace and must continuously tap capital markets to finance persistent fiscal deficits. On the other hand, the private sector, led by the artificial intelligence boom, is absorbing vast amounts of capital to fund data centres, semiconductor capacity, and technological infrastructure. Capital, once abundant and seemingly free, is becoming scarcer and more expensive. This raises the risk of a self-reinforcing dynamic in which higher borrowing needs push yields higher, increasing debt-servicing costs and further intensifying the competition for capital. At some point, both equity valuations and corporate financing conditions are unlikely to remain immune to this reality, yet in the short term and after the recent increases, I would not be surprised to see some easing of rates, which brings me to the topic of correlations.

U.S. Treasuries II

Now, before looking at correlations, what could the interest path for U.S. yields be, you may ask? The next Fed meeting will take place on the 28th of October. The probability that the key interest rate will be kept unchanged at that meeting is over 80%. The Fed usually adopts a cautious stance in the run-up to the mid-term elections, which take place in early November. However, three further interest rate rises of 25 basis points each could take place in December, March and June.

Correlations

Having looked at U.S. interest yields, let us briefly look at what we can learn from U.S. interest rate correlations. First, we have to agree that correlations are neither stable nor immutable; rather, they evolve continuously in response to shifting market regimes, liquidity conditions, macroeconomic narratives, and investor behaviour. The relationship between the S&P 500 and Bitcoin offers a compelling illustration of this phenomenon. For much of its early history, Bitcoin exhibited little meaningful correlation with traditional risk assets, reinforcing its reputation as an independent alternative asset. Since 2020, however, periods of heightened macroeconomic uncertainty have at times pushed short-term correlations with equities toward levels as high as 0.7, reflecting the growing influence of global liquidity and risk sentiment. Yet these linkages have repeatedly weakened when crypto-specific developments regained prominence, underscoring the inherently dynamic nature of correlation structures. Nevertheless, should U.S. Treasury yields have reached a cyclical peak, at least in the near term, the resulting easing in US$ strength could provide support for equities. With yields stagnating, the stock market would also show signs of improvement in market breadth. Interest-rate-sensitive utility shares, as well as small- and mid-caps, could show signs of stabilisation. Investor behaviour would shift towards a ‘buy the dip’ approach also in precious metals. In such a case and given gold’s notably weak performance in recent months, a period of relative outperformance and mean reversion would not surprise me.

Conclusion

…which brings me to today’s conclusion. The recent rise in U.S. Treasury yields serves as a timely reminder that the cost of capital remains one of the most powerful forces shaping investment outcomes. While markets often become preoccupied with forecasting the next policy decision, election result, or macroeconomic surprise, long-term wealth creation ultimately depends less on predicting the future than on owning assets capable of creating value across a wide range of economic environments. The investment approach for Incrementum’s private clients therefore consistently focuses on long-term investments in productive companies. The emphasis is on sustainable returns, capital discipline and the power of compound interest as a driver of wealth accumulation. In contrast, there are assets which do not generate cash flows themselves. The investor benefits primarily from other market participants being willing to pay a higher price in the future or from the asset’s scarcity becoming more significant over time. This is why, in an increasingly uncertain world, we remain committed to businesses that can compound capital, generate resilient cash flows, and create enduring value throughout the economic cycle.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 153
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li