5% changed the maths. Most investors haven't noticed.

For most of the last fifteen years, one of the most important numbers in investing was also one of the easiest to ignore.

The risk-free rate.

For much of the period after 2008, the US 10-year Treasury yielded somewhere between 1% and 3%. There were periods when it fell even lower.

That mattered because every investment has an alternative.

If I could earn 2% from a US government bond, then a dividend stock yielding 5%, an infrastructure investment targeting 7% or a business promising much higher returns all started from a relatively low hurdle.

That world has changed.

The US 10-year Treasury has moved above 5%, reaching levels not seen since 2007. In Saudi Arabia, SAMA raised its repo rate to 4.50% in September. With the Saudi riyal pegged to the US dollar, Saudi interest rates tend to move closely with US rates.

For me, this changes the starting point for almost every investment decision.

If I can earn around 5% from a highly liquid US government bond, I need more than 5% to justify taking equity risk. I need more again if I am accepting illiquidity, leverage, construction risk or uncertainty about future cash flows.

The question is how much more.

This distinction has become increasingly important to me.

When I look at an investment now, one of the first questions I ask is:

What can I earn without taking this risk?

That is my starting point.

Then I can ask what additional return I am being offered for taking the risk in front of me.

Take a dividend stock yielding 5%.

If the company can sustainably grow that dividend by around 3% a year, and its valuation remains broadly unchanged, something around an 8% long-term return might be reasonable.

But I am taking equity risk to earn it.

The company's earnings could fall. The dividend could be cut. The share price will move. Management could allocate capital badly. The growth I expected might not materialise.

If my alternative is approximately 5% with substantially less credit risk and volatility, then the potential extra return from the equity is what I need to examine.

Is an additional three percentage points enough compensation?

Maybe.

But that is a very different question from simply asking whether an 8% expected return sounds attractive.

The difference becomes even clearer with infrastructure.

Imagine an infrastructure investment targeting a 7% return.

When government bonds yielded 2%, that investment offered roughly five percentage points of additional expected return.

At a 5% risk-free rate, the spread is closer to two.

The asset itself may not have changed. It may still have the same contracts, the same expected cash flows and the same underlying economics.

What changed is the alternative.

That two percentage point difference is now the compensation I am being offered for giving up liquidity and accepting whatever construction, regulatory, financing and operating risks come with the project.

That doesn't automatically make the investment unattractive.

It just means 7% cannot be considered in isolation.

I need to know what I am being paid for the risks I am taking.

There is another part of this that matters for stocks, particularly companies where much of the value depends on profits expected years into the future.

When analysts value a company, they are effectively asking what its future cash flows are worth today.

The risk-free rate is one component of the discount rate used to make that calculation. When the risk-free rate rises, the discount rate investors use to value future cash flows generally rises with it.

The impact can be surprisingly large.

Take SAR100 that I expect to receive ten years from now.

Using a simple illustration, at a 2% discount rate that SAR100 is worth roughly SAR82 today.

At 5%, it is worth about SAR61.

Nothing happened to the future SAR100.

I simply changed the rate I used to value it today.

That is one reason interest rates matter so much for expensive growth companies. If a large part of what I am paying for depends on earnings five, ten or fifteen years into the future, the rate I use to value those earnings matters enormously.

A valuation that made sense when rates were close to zero does not automatically make sense when rates are around 5%.

This is something I kept coming back to when I was researching Saudi Arabia's AI infrastructure plans.

There are enormous amounts of capital going into data centres, power infrastructure, connectivity and compute.

Last week, I wrote about Center3's plan to invest another $10 billion through 2030 as it builds towards 1GW of data-centre capacity.

The infrastructure may be necessary. The demand may be real.

But the capital still has to earn a return.

Imagine a data-centre project targeting a 10% return.

When the low-risk alternative was 1% or 2%, that 10% looked very attractive.

If the alternative is now around 5%, the calculation changes.

The project still carries construction risk. It still has utilisation risk. Technology can change. Customers can renegotiate. Financing costs matter. And billions of dollars may be committed before the asset generates the cash flows investors expect.

So 10% is not enough information.

I need to know what I am earning above my alternative, and whether that difference adequately compensates me for everything that can go wrong.

That is the part of the AI infrastructure story I think will become increasingly important as more projects move from announcements into actual financing and construction.

I invest in dividend-paying Saudi companies partly because I want income.

But I have become more demanding about what I consider an attractive yield.

A 5% or 6% dividend yield does not automatically make a stock attractive to me simply because the number looks high.

I want to know whether the dividend is sustainable.

Can it grow?

What is happening to earnings and cash flow?

How much debt does the company have?

What capital appreciation could reasonably come alongside the dividend?

And, after considering all of that, how much additional return am I expecting for accepting equity risk instead of choosing the lower-risk alternative?

This does not mean I stop owning equities because government bonds yield 5%.

Far from it.

A good business can grow earnings, increase its dividend and compound its value for decades. A bond cannot offer me that same upside.

But the comparison makes me more disciplined about the price I am willing to pay for that upside.

I have reduced most of this to three questions.

What can I earn without taking this risk?

That gives me my starting point.

What extra return am I being offered for taking it?

That tells me the premium.

Is that extra return enough?

That is where the actual investment decision begins.

The answer will be different depending on what I am looking at.

I should demand something different from a mature dividend-paying company than from a speculative growth stock. I should demand something different again from an illiquid private investment or an infrastructure project that locks up my capital for years.

There isn't one hurdle rate that works for everything.

But there should always be a hurdle.

I still want to own businesses. I still want dividends. I still want exposure to companies that can compound for years.

Higher risk-free rates haven't changed that.

What they have changed is the way I look at the return in front of me.

I no longer look at a stock yielding 6% and stop at: 6% is attractive.

I ask:

6% compared with what?

That small change has made me more demanding about what I buy and what I am willing to pay.

The risk-free rate is not the return I am trying to earn.

It is the return every other investment has to convince me to leave behind.

Sources: US 10-year Treasury yield, Federal Reserve data via MacroRadar (September 2026); Saudi Central Bank September 2026 monetary policy decision; Center3 infrastructure investment announcements.

The Quiet Compounder is for educational purposes only and is not financial advice. Always do your own research or consult a licensed advisor before making investment decisions.