Bonds move opposite to rates
If you hold a bond paying 3% and new bonds pay 5%, yours is less attractive, so its price falls. Longer-term bonds are more sensitive. Duration estimates this: a bond fund with a duration of 7 would lose roughly 7% if rates rose 1 percentage point.
Stocks and rates
Higher rates raise companies' borrowing costs and make safer assets more competitive. They also reduce the present value of profits expected far in the future, which is why fast-growing, high-valuation companies have often been hit harder by rising rates.
Cash and real estate
Savers benefit from higher rates on cash. Real estate often faces pressure because mortgage costs rise and reduce buyers' purchasing power.
The 2022 example
As central banks raised rates quickly to fight inflation in 2022, both broad stock and bond indexes fell in the same year, an unusual combination that hurt many balanced portfolios.
Key takeaways
- Rising rates usually lower bond prices, especially long-term bonds.
- High-valuation growth stocks tend to be most rate-sensitive.
- Cash yields improve when rates rise.