As bond yields march higher, small companies are taking the brunt of the damage.

The Russell 2000 index, which tracks shares of smaller companies, fell for a fifth-straight week, its longest weekly losing streak since May 2022. The index was lower by 0.9% this week and down 5.7% over the five-week span. The decline is a stark departure from the first half of this year, when small caps had their biggest run in decades.

Investors are worried that surging Treasury yields will hit small companies where it hurts most: their borrowing costs. Unlike large multinationals, smaller companies typically have limited access to capital markets and rely on short-term or floating-rate loans that track rates set by the Federal Reserve. At the same time, the profits of many of these businesses are already under pressure thanks to the rising cost of fuel and other goods.

"You are kind of getting that dual squeeze," said David Miller, chief investment officer and senior portfolio manager at Catalyst Funds. "As your borrowing costs go up, your margins go down."

The yield on the 10-year Treasury note, which influences interest rates across the economy, settled at 5.243% Friday after touching a fresh 24-year high earlier this week.

What's worse, a rising proportion of small companies' long-term debt comes due over the next five years, which means they would need to be refinanced at higher rates, according to a recent research note from Bank of America. Last month, the central bank raised interest rates for the first time in three years, and investors expect further hikes to rein in inflation.

Since the Russell 2000's weekly losing streak began, healthcare and consumer discretionary stocks have been among the hardest hit. Early-stage biotech companies borrow heavily to fund clinical trials long before making a profit. Meanwhile, consumer-facing companies have been squeezed as higher borrowing costs and sticky inflation erode household purchasing power.

Shares of biopharmaceutical company Caribou Biosciences fell 62% this week after announcing it is exploring strategic alternatives and cutting jobs. Neighborhood Intelligence, the company previously known as Bed, Bath and Beyond, dropped 39%.

Gains by many of the benchmark indexes have been heavily concentrated in a relatively small number of stocks, with many others flat or falling.

"More than half of the small-cap index is below its 52-week high by more than 20%, so a lot of these stocks are in corrections or mini-bear markets of their own," said Jeff Blazek, co-chief investment officer of multiasset strategies at Neuberger, which recently downgraded small-cap stocks to "target weight" after about three years of being "overweight" on smaller stocks.

Blazek added that many of last year's outperforming small-cap AI stocks have since graduated to midcap and large-cap indexes, removing key growth drivers and further weighing on the Russell 2000s recent performance.

On Friday, the S&P 500 rose 0.6%, and the Nasdaq gained 0.6%. The Dow Jones Industrial Average added 423 points, or 0.8%. All three indexes closed in the green for the week.

Small-caps' recent stretch of underperformance might be good news for bargain hunters. The valuations of small-cap stocks have dropped significantly, and are now below their historical averages during times when interest rates were 5% to 7%, according to analysts at Bank of America. The bank expects 10-year yield to settle at around 5% by the end of the year, adding that small-cap stocks could rebound if rates peak soon.

"Because rates are trading so much in sympathy with oil, and oil is trading so much related to Iran," said Blazek, "a favorable yield environment or a resolution to the Iran war, those would probably encourage at least short-term outperformance of small-caps."