October 2026 Market Insight

The Cost of Capital Has Reset: What 5% Treasury Yields Mean for M&A, Private Credit, and Business Owners

The cost of capital is no longer waiting to normalize. On September 16, the Federal Reserve raised the federal funds target range by 25 basis points to 3.75% to 4.00%. By September 29, the U.S. Treasury par yield curve showed the 10-year Treasury at 5.26%, the 20-year at 5.64%, and the 30-year at 5.59%. At the same time, higher oil and gasoline prices are putting renewed pressure on headline inflation and operating costs.

For private companies, buyers, lenders, and investors, these are not separate market stories. They are connected through the required return on capital. When government securities offer yields above 5% at longer maturities, debt and equity capital deployed into private businesses must clear a higher economic hurdle. Financing can still be available, transactions can still close, and companies can still invest. The margin for weak underwriting, however, becomes smaller.

The October environment therefore requires a different question than whether rates will eventually decline. Owners and investors need to ask whether a capital structure, acquisition, refinancing, or growth plan works under the rates that exist now.

The Fed Tightened Into an Economy It Still Describes as Solid

The Federal Open Market Committee voted unanimously on September 16 to increase the federal funds target range by one quarter of a percentage point to 3.75% to 4.00%. The decision is important, but the economic description accompanying it is equally important.

The Federal Reserve said economic activity was expanding at a solid pace. It also described domestic spending as resilient, productivity growth as strong, capital investment as robust, and inflation as elevated. Job gains were reported as keeping pace with the workforce while the unemployment rate had changed little.

That combination matters for capital planning. The Fed is not responding to an economy that it describes as broadly contracting. It is tightening policy while economic activity continues to hold up and inflation remains above its objective. Businesses should therefore be careful about building financing plans around an assumption that weaker growth will quickly force substantially easier monetary policy.

A 5% Treasury Market Changes the Hurdle Rate

The long end of the Treasury curve has become one of the most important inputs in capital allocation. On September 29, Treasury reported par yields of 5.06% at five years, 5.16% at seven years, 5.26% at ten years, 5.64% at twenty years, and 5.59% at thirty years.

Those yields affect more than government borrowing. Treasury rates serve as reference points throughout financial markets. When the return available on government securities rises, investors generally require additional compensation to assume credit risk, illiquidity, operating risk, execution risk, and equity risk elsewhere.

For a private company, the practical effects show up in several places at once. Debt service becomes more expensive. Discount rates increase. Leverage capacity can tighten. Refinancing proceeds may be lower than an owner expected. A buyer's acceptable purchase price may change because the financing burden and required equity return have changed. Growth projects that looked attractive under a lower base rate may no longer produce an adequate return after the cost of capital is properly included.

This does not mean investment stops. It means the hurdle is higher.

Oil, Gasoline, and the Return of Energy Inflation Pressure

Energy costs have become a material part of the inflation picture again. The Bureau of Labor Statistics reported that the Consumer Price Index increased 0.4% in August and 3.4% over the preceding twelve months. Gasoline prices rose 3.9% during August and accounted for more than one third of the monthly increase in the all-items CPI. Compared with August 2025, the gasoline index was 27.4% higher and the broader energy index was 16.3% higher.

The pressure did not disappear in October. EIA data for September 28 showed WTI crude at $99.37 per barrel and Brent crude at $119.97. EIA's weekly retail data placed the national average for regular gasoline at approximately $4.47 per gallon for the week of September 28. Its daily price snapshot showed U.S. retail diesel around $6.44 per gallon.

For businesses, the inflation effect extends beyond what a customer pays at the pump. Higher petroleum costs can move through freight, distribution, field service, construction, manufacturing, agriculture, chemicals, packaging, aviation, and other energy-intensive parts of the economy. The degree of pass-through differs by industry and contract structure, but the cost pressure itself is measurable.

This is particularly important for companies operating with thin margins or limited pricing power. A business can report stable revenue while cash flow deteriorates underneath it if fuel, transportation, utilities, materials, and financing costs rise faster than prices can be adjusted.

Owners should separate temporary commodity volatility from structural exposure. If a company cannot identify how a sustained period of expensive energy would affect gross margin, working capital, customer pricing, and free cash flow, the company does not yet have a complete downside case.

Private Credit: Availability Is Not the Same as Affordability

Private credit remains an important financing channel for companies and sponsors that need flexibility beyond conventional bank structures. But the basic economics of private lending still begin with the underlying rate environment. A lender taking private-company credit risk must earn a return above the relevant base rate and must be compensated for leverage, collateral quality, cyclicality, liquidity, documentation, and downside risk.

That distinction matters because a borrower can have access to capital and still face a structure that does not make economic sense. The correct question is not simply whether a lender will fund the transaction. It is whether the company can service the debt through a realistic downside case without starving operations, delaying necessary capital expenditures, or creating a refinancing problem several years later.

Owners evaluating private credit should model the full financing package, including cash interest, original issue discount or fees where applicable, amortization, covenant requirements, maturity, prepayment economics, collateral, and any equity participation. Headline leverage alone does not describe the cost of the capital.

M&A: Purchase Price Is Only Half the Deal

A higher rate environment puts transaction structure back at the center of acquisition underwriting. The purchase multiple still matters, but it cannot be evaluated separately from the debt package, required equity contribution, cash conversion, capital expenditures, working capital needs, and the amount of free cash flow available for deleveraging.

In a leveraged acquisition, higher interest expense can materially reduce the portion of operating cash flow available to pay down debt. That changes the return profile even when the acquired company's operating performance is unchanged. If the model also assumes aggressive margin expansion or a generous exit multiple, the buyer may be stacking several favorable assumptions on top of an already expensive capital structure.

Sellers face the same economics from the opposite direction. A buyer may like the business and still require a different price or structure because financing costs have changed. That can increase the importance of rollover equity, seller financing, contingent consideration, earnouts, working capital protections, and other mechanisms that allocate risk between buyer and seller.

None of those structures are automatically good or bad. Their value depends on the economics of the specific transaction. What matters is understanding which party is carrying which risk, when cash changes hands, and what assumptions must hold for the transaction to produce the expected return.

Capital Has Alternatives Now

One of the easiest mistakes in this environment is to interpret expensive capital as unavailable capital. They are not the same thing.

Capital will continue to move toward businesses, assets, and transactions that offer an adequate return for the risk assumed. What has changed is the comparison. An investor evaluating private equity, private credit, an acquisition, a real asset, or a growth investment is doing so against a much more competitive risk-free rate than existed during the low-rate period.

That raises the standard for underwriting. A transaction needs a credible path to cash generation. A growth investment needs a defensible return on incremental capital. A leveraged company needs sufficient coverage for volatility. A seller asking for a premium valuation needs financial performance and business quality capable of supporting it.

The market does not need to run out of money for capital discipline to tighten. The opportunity cost of capital can do that on its own.

What Private Company Owners Should Be Doing Now

Owners do not need to predict the next Federal Reserve meeting or the next move in crude oil to make better capital decisions. They need to understand how the current environment changes the economics of their own company.

• Recalculate debt capacity using current rates. Do not rely on leverage assumptions developed under a lower base-rate environment.
• Model refinancing before the maturity window becomes urgent. Include realistic interest expense, amortization, fees, covenant headroom, and liquidity requirements.
• Stress test energy exposure. Quantify the effect of higher fuel, freight, utilities, raw materials, and supplier costs on gross margin and free cash flow.
• Separate revenue growth from cash generation. Higher nominal sales do not necessarily mean stronger economics when input costs and financing costs are rising at the same time.
• Re-underwrite acquisition models. Test the deal using current financing costs, conservative deleveraging assumptions, and an exit multiple that does not require market generosity.
• Know the company's actual return on incremental capital. Growth should create value after accounting for the capital required to produce it.
• Prepare multiple financing paths. Bank debt, private credit, seller financing, minority equity, rollover equity, and internally generated cash each carry different costs and control implications.
• Build the downside case before a lender or buyer does it for you. Management should already know what happens if rates stay high, energy remains expensive, revenue slows, or margins compress.

Final Positioning Outlook

The October market is sending a straightforward message. The cost of capital has reset higher, and businesses should be evaluated accordingly.

The Federal Reserve has tightened policy while describing economic activity as solid and inflation as elevated. Long-term Treasury yields are above 5%. Energy prices are again contributing materially to headline inflation, with gasoline accounting for more than one third of August's monthly CPI increase. None of those conditions prevent companies from investing or transactions from closing. They do require better underwriting.

For business owners, the strategic advantage is not predicting exactly when rates, oil, or inflation turn. It is knowing whether the company can perform if they do not turn quickly.

A strong balance sheet creates choices. Clean reporting improves credibility. Realistic underwriting protects capital. Transaction preparation improves negotiating leverage. Those disciplines matter in every market, but they become more valuable when money itself is expensive.

For private company owners, buyers, and investors, the priority is to make sure the economics work before the market tests them.

Data Sources

This market commentary uses publicly released data from the Federal Reserve Board, U.S. Department of the Treasury, U.S. Bureau of Labor Statistics, and U.S. Energy Information Administration. Market figures cited in this edition reflect the latest releases available as of September 29, 2026.

Important Note

This commentary is provided for general informational purposes only and does not constitute investment advice, legal advice, tax advice, accounting advice, or a recommendation to buy, sell, or hold any security. Business owners and investors should consult appropriate professional advisors before making financing, transaction, or investment decisions.