Interest rates are going back up. At least, that’s what the bond market believes. Since starting this year below 4.0%, the yield on the 10-year Treasury Note rose above 4.3% on February 13.

That day, we learned the Consumer Price Index (CPI) for All Urban Consumers rose 0.3% in January. Over the previous 12 months, “headline” CPI as it is also known grew by 3.1%.

Excluding food and energy, “core” CPI rose 0.4% last month and was up 3.9% during the past year. All those numbers were higher than Wall Street was anticipating.

Although not a big move in absolute terms, the fact that CPI is edging up has Wall Street on edge. A month ago, the stock market was surging on the belief that the Fed may start cutting interest rates soon.

Wall Street shook off that unwelcome news. After a small drop that day, the S&P 500 Index rallied over the remainder of last week to finish very close to its all-time high set at the start of the week.

I don’t know how much longer Wall Street can ignore these facts: The economy is growing faster than expected, the jobs market is expanding, and consumers spending has not slowed down.

That’s why the bond market was quick to respond. Unlike the stock market which tends to trade on optimism, the bond market is a bastion of realism.

Rising interest rates mean higher borrowing costs for businesses and consumers. When rates are low, borrowed money can amplify profit margins. But when rates are high, profit margins contract.

Cars and Phones

This recent development is bad news for all borrowers. It could be especially tough on capital intensive businesses that rely heavily on borrowed money to acquire assets.

Last year, Global Finance published a list of the “The World’s Most Indebted Companies 2023.” Number one on that list is Toyota Motor (NYSE: TM) with $217 billion of long-term debt. That equates to roughly 80% of the company’s $271 billion of annual revenue.

There are two other automakers on that list. Volkswagen AG (OTC: VWAGY) was third at $166 billion of long-term debt. Ford Motor (NYSE: F) held down the sixth spot at $139 billion.

That doesn’t surprise me. Automakers require gobs of capital to build factories and buy raw materials.

Another industry that uses a lot of borrowed money to fuel growth is telecommunications. Building transmission towers and laying fiber optic cable is expensive.

That’s why Verizon Communications (NYSE: VZ) is number four on the list with $151 billion in debt. That exceeds its annual revenue of $10 billion by 45%.

AT&T (NYSE: T) wasn’t far behind in the eighth slot. It borrowed $136 billion compared to $121 billion in sales. One spot behind AT&T was Deutsche Telekom AG (OTC: DTEGY) at $115 billion in debt.

In case you’re wondering, the other four companies on the list are a Chinese theme park operator China Evergrande Group, German banking giant Deutsche Bank (NYSE: DB), Japanese public investment fund SoftBank Group (OTC: SFTBY), and French state-owned utility conglomerate Electricite de France.

Canaries in the Coal Mine

Thus far, none of those companies appear to be in Wall Street’s crosshairs. The recent bump in CPI and consequent rise in interest rates is being ignored for the time being.

But if rates rise much higher, portfolio managers may start dumping companies with a lot of debt. In turn, that could trigger a stock market correction since most of those companies are large-cap stocks that exert outsized influence on the major stock market indexes.

That’s why I am watching the automotive and telecom sectors closely. In this case, they may be the canaries in the coal mine. If they start to dive, the rest of the stock market may not be far behind them.

The simplest way to do that is to track exchange-traded funds for each industry. For example, Verizon and AT&T are among the top four holdings of the iShares U.S. Telecommunications ETF (NYSE: IYZ).

Presumably, the global financial markets are reacting to the prospect of higher interest rates. After peaking near $24 during the last week of January, IYZ fell below $22 last week (circled area in chart below).

This fund has strong intermediate-term technical support between $21. If it falls below that level, then the stock market correction I alluded to earlier may be in the works.

Of course, a drop in CPI next month could settle nerves on Wall Street. But until that happens, any more evidence suggesting inflation is on the rise could send these stocks tumbling.

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