3 Takeaways on rising long-term interest rates (2024)

Short-term interest rates have remained near zero this year, anchored by the Federal Reserve’s support for the economic rebound. But longer-term rates have risen amid evidence of strong growth and the prospects of higher inflation, pressuring bond returns. For example, 10-year Treasury rates started 2021 below 1%, the lowest level to start a calendar year in history, but have since nearly doubled.

For investors wondering what this means for their stock and bond portfolio allocations, we’d offer three takeaways.

1. Rates have risen for the right reasons. Rising bond yields are typically associated with periods of accelerating growth and positive equity returns. Long-term rates have risen as growth and inflation have picked up. A healthier economy and rising demand produce higher inflation, so in our view, higher rates indicate confidence in the economic rebound.

Historically, stocks have performed better when rates are rising than when they are falling. Long-term interest rates have trended downward for more than 20 years, as shown in the graph below. But there have been five periods when benchmark 10-year rates rose noticeably. In those instances, the S&P 500 increased at a faster-than-average pace.

Source: FactSet, Edward Jones calculations as of 4/30/2021. Investment-grade bonds represented by the Bloomberg Barclays aggregate bond index.

2. “Higher” rates aren’t the same as “high” rates. The trajectory and speed at which rates rose earlier this year may have appeared abrupt. But this simply brought 10-year interest rates back to pre-pandemic levels, with 10-year yields still near historic lows. Now that we’ve returned to pre-pandemic GDP levels, we expect a maturing expansion to drive inflation pressures, which will eventually require Fed rate hikes. This will send longer-term interest rates to more restrictive levels. But in our view, we are several years away from higher rates posing a risk to the economy.

In the meantime, as the Fed keeps short-term rates pinned to zero and long-term rates will likely rise modestly, the yield curve – the difference in yields between short- and long-term bonds – will continue to steepen. A steepening yield curve has historically helped the relative performance of financials and other cyclical sectors.

3. Bonds can still add value in a rising rate environment. We believe that even when rates are rising, you should maintain an appropriate allocation to fixed income within your portfolio. Bonds can help provide a relatively predictable stream of income. They also can act as a portfolio stabilizer, helping to smooth out returns during times of market volatility.

A bond’s coupon payments and credit quality don’t change when interest rates rise. But bond prices fall as new bonds are issued with a higher interest rate. While longer-term bonds typically provide higher yields, they also come with greater interest rate risk.

A balanced fixed-income portfolio with short-, intermediate- and long-term bond maturities – known as bond laddering – can help position your fixed-income portfolio as interest rates change. We also recommend including an appropriate allocation to investment-grade and high-yield bonds. While these bonds carry the risk of increased credit exposure, they have historically improved portfolio returns in periods of accelerating economic growth.

Key points for investors

  • As the economy gains traction, the path of least resistance for long-term rates will be higher, in our view. But they likely will not rise at the same trajectory as they did recently.
  • You should expect periodic setbacks as the recovery advances. But with economic, policy and corporate financial conditions still aligned to the earlier stages of the business cycle, we think increases in rates from recent historic lows represent a short-term risk to the current rally, not a more structural threat to the broader expansion.
  • If you’re concerned about changing market conditions, talk with your financial advisor. He or she can help ensure your portfolio is properly diversified. Exposure to cyclical sectors, which can benefit from a steepening of the yield curve, and bond laddering can help you successfully navigate the shifting investment landscape ahead.

Angelo Kourkafas

Angelo Kourkafas is responsible for analyzing market conditions, assessing economic trends and developing portfolio strategies and recommendations that help investors work toward their long-term financial goals.

He is a contributor to Edward Jones Market Insights and has been featured in The Wall Street Journal, CNBC, FORTUNE magazine, Marketwatch, U.S. News & World Report, The Observer and the Financial Post.

Angelo graduated magna cum laude with a bachelor’s degree in business administration from Athens University of Economics and Business in Greece and received an MBA with concentrations in finance and investments from Minnesota State University.

Read Full Bio

Angelo Kourkafas is responsible for analyzing market conditions, assessing economic trends and developing portfolio strategies and recommendations that help investors work toward their long-term financial goals.

He is a contributor to Edward Jones Market Insights and has been featured in The Wall Street Journal, CNBC, FORTUNE magazine, Marketwatch, U.S. News & World Report, The Observer and the Financial Post.

Angelo graduated magna cum laude with a bachelor’s degree in business administration from Athens University of Economics and Business in Greece and received an MBA with concentrations in finance and investments from Minnesota State University.

Read Full Bio

3 Takeaways on rising long-term interest rates (2024)

FAQs

3 Takeaways on rising long-term interest rates? ›

Interest rate levels are a factor in the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them.

How to benefit from rising interest rates? ›

Some potential suggestions for bond investors in a rising interest rate and rising inflation environment include:
  1. Invest in shorter-duration bond mutual funds and ETFs. ...
  2. Ladder the maturities of individual bonds. ...
  3. Consider investing in inflation-protected Treasuries or TIPs.
May 13, 2024

What are two reasons why long term interest rates rise? ›

Interest rate levels are a factor in the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them.

What are the effects of rising interest rates? ›

Higher interest rates tend to negatively affect earnings and stock prices (often with the exception of the financial sector). Changes in the interest rate tend to impact the stock market quickly but often have a lagged effect on other key economic sectors such as mortgages and auto loans.

What are 3 negative outcomes that could happen with higher interest rates? ›

The Cons of Rising Interest Rates
  • New loans will cost more. Just as banks are paying more in interest to depositors, they're charging more to borrowers. ...
  • Payments will go up on adjustable-rate loans. ...
  • Home equity may decline. ...
  • There's a higher chance of a recession. ...
  • Stock market volatility may continue.
Mar 6, 2023

What are the advantages of increasing interest rates? ›

Higher interest rates have gotten a bad rap, but over the long term, they may provide more income for savers and help investors allocate capital more efficiently. In a higher-rate environment, equity investors can seek opportunities in value-oriented and defensive sectors as well as international stocks.

How does raising interest rates help me? ›

The benefits of higher interest rates

Higher interest rates can be good news. The savings in a "high-interest" bank account could grow faster. Also, many fixed-rate investments, like guaranteed interest options or guaranteed investment certificates (GICs), could give you higher returns.

Why is raising interest rates good? ›

Raising rates may help slow spending by increasing the cost of borrowing, potentially reducing economic activity to slow inflation down. Raising rates may also encourage saving, as money in a savings or CD account earns more interest than in a low rate environment.

What causes long-term yields to rise? ›

Prices and yields move in opposite directions. 1 When investors are feeling better about the economy, they are less interested in safe-haven Treasurys and are more open to buying riskier investments. As such, the prices of Treasurys dip, and the yields rise.

What are the three factors that determine long-term interest rates? ›

Long-term interest rates are mainly determined by three factors: the price that lenders charge for postponing consumption; the risk that the borrower may not repay the capital; and the fall in the real value of the capital that the lender expects to occur because of inflation during the lifetime of the loan.

Who benefits from increased interest rates? ›

The financial sector generally experiences increased profitability during periods of high-interest rates. This is primarily because banks and financial institutions earn more from the spread between the interest they pay on deposits and the interest they charge on loans.

What is the impact of interest rates going up? ›

Higher interest rates increase the return on savings. They also make the cost of borrowing more expensive. Higher interest rates help to slow down price rises (inflation).

How does increasing interest rates reduce inflation? ›

Increasing the bank rate is like a lever for slowing down inflation. By raising it, people should, in theory, start to save more and borrow less, which will push down demand for goods and services and lead to lower prices.

What are the risks or disadvantages of the Fed raising interest rates? ›

Higher interest rates can make borrowing money more expensive for consumers and businesses, while also potentially making it harder to get approved for loans. On the positive side, higher interest rates can benefit savers as banks increase yields to attract more deposits.

What are the likely consequence of an increase in the rate of interest? ›

Rising interest rates affects spending because the cost of borrowing money goes up. So, if you have a mortgage, any type of credit card or a loan, you could end up paying more for the money you originally borrowed. This will mean that you inevitably have less money to spend on goods and services.

What are the three main factors that affect interest rates? ›

How are interest rates determined? Market conditions and the risks associated with lending largely influence interest rates. Factors such as inflation, economic growth, and availability of funds also play a role in determining interest rates.

How to make money when interest rates go up? ›

These options could include:
  1. Individual bonds versus bond funds.
  2. Treasury bonds or notes.
  3. Real estate investment trusts, or REITs, which tend to hold up well or even outperform during times of rising interest rates.
  4. Preferred stocks versus common stocks.
Feb 20, 2024

Who benefits the most when interest rates increase? ›

The financial sector generally experiences increased profitability during periods of high-interest rates. This is primarily because banks and financial institutions earn more from the spread between the interest they pay on deposits and the interest they charge on loans.

What is the benefit of the Fed raising interest rates? ›

On the positive side, higher interest rates can benefit savers as banks increase yields to attract more deposits. The average savings yield is now almost 10 times higher than it was when the Fed first started raising rates, and online banks often offer even higher yields.

Is it better to buy when interest rates are high? ›

Pros. Home prices and interest rates could keep rising, so while rates are higher than they were a few years ago, you might get a better deal now than if you wait. With fewer buyers shopping right now due to higher costs of borrowing, you might have more negotiating power.

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