Caterpillar Drops 6% as Industrials Sell Off With Long Yields at a Two-Decade High; Deere Falls 4%, PACCAR Eases

Rising long-term borrowing costs are landing hardest on the companies that sell big machines on credit, and Caterpillar (NYSE:CAT | CAT Price Prediction) is absorbing the heaviest blow in the group. Caterpillar stock is down 6% to $811.70 in morning trading, with long-dated Treasury yields pushing to their highest level in more than two decades.

Meanwhile, shares of Deere (NYSE:DE) are sliding 4% to $657.95, a smaller drop that follows the same rate-driven path. PACCAR (NASDAQ:PCAR) shares are slipping 2% to $106.66, the smallest decline among the three equipment makers.

At the same time, the Industrial Select Sector SPDR ETF (NYSEARCA:XLI) is falling 2% to $167.34, confirming that the pressure stretches across the whole industrial sector. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is down 0.6% to $774.67, which leaves the industrial fund’s decline several times what the broad market is doing.

Long Yields Squeeze Credit-Driven Equipment Demand

Selling in Caterpillar stock traces back to the bond market, where long-dated Treasury yields climbed to their highest level in more than two decades. Heavy equipment is typically bought on credit. It is also carried on dealer rental fleets, so a jump in borrowing costs lands directly on the demand Caterpillar, Deere and PACCAR are selling into. Higher long-term rates also raise the bar that construction, mining and trucking customers must clear before committing to big capital purchases.

Caterpillar builds construction and mining equipment, engines, turbines and locomotives, and runs a financing arm that lends to customers and dealers, which means a change in interest rates reaches Caterpillar twice, through customer demand and its own lending business. Deere and PACCAR use comparable dealer and financing arrangements, so all three carry the same credit sensitivity.

Caterpillar Expands Compact Equipment Capacity

On the corporate front, Caterpillar announced a $1 billion investment to expand its compact equipment manufacturing capacity in North Carolina, with the project focused on advanced manufacturing technology, automation and digital systems. The company’s stated aim for the project is to support customer demand and workforce development in the region. Those plans sit apart from the selling, which lines up with the rate move and the sector-wide decline.

The bull case for Caterpillar rests on capital commitment. The company is committing capital to the part of its lineup serving small contractors and rental fleets, a steadier source of demand than large project equipment and a reasonable area to build into. Timing drives the bear case for Caterpillar, because added capacity costs money now and pays back on demand that higher borrowing costs may delay.

Caterpillar stock trades at a trailing twelve-month price-to-earnings ratio of 35x, which is at the elevated end for an industrial. That valuation was in place before the decline began, and the sector-wide figures point to yields as the force behind the drop in Caterpillar shares. Further gains in long yields could compress that multiple, since higher discount rates tend to weigh on highly valued cyclicals like Caterpillar.

What to Watch Next

The next signal for Caterpillar stock is whether the heavy machinery group steadies when long yields do, since that’s where the figures point. Shareholders can watch for a pause in the climb of long-dated Treasury yields, which could ease pressure on Caterpillar, Deere and PACCAR at once.

Caterpillar’s North Carolina project gives the company a longer-term demand story, but the return depends on borrowing costs that remain elevated. Traders may want to reduce their position sizes and also watch for whether the Industrial Select Sector SPDR ETF steadies alongside Caterpillar stock if rate pressure fades.

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