Curated by: Rubric Advisors
Investing & Markets
Interest Rate Risk
Interest rate changes affect nearly every asset class. Understanding duration, yield curves, and rate sensitivity helps investors position portfolios for different rate environments.
Interest Rate Risk
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What Is Interest Rate Risk?
- The risk that changing interest rates will affect investment values
- Bond prices move inversely to interest rates, rates up, prices down
- Rate risk applies beyond bonds to stocks, real estate, and other assets
- Both rising and falling rates create winners and losers across portfolios
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Full Guide
What Is Interest Rate Risk?
- The risk that changing interest rates will affect investment values
- Bond prices move inversely to interest rates, rates up, prices down
- Rate risk applies beyond bonds to stocks, real estate, and other assets
- Both rising and falling rates create winners and losers across portfolios
Duration, Measuring Sensitivity
- Duration estimates how much a bond's price changes per 1% rate move
- A bond with 5-year duration loses roughly 5% if rates rise 1%
- Longer maturities and lower coupons increase duration and sensitivity
- Modified duration is the standard measure; effective duration adjusts for options
Impact on Bonds and Stocks
- Long-term Treasury bonds are among the most rate-sensitive investments
- Short-term bonds and money markets have minimal price sensitivity
- Corporate bonds face rate risk plus credit spread changes simultaneously
- Growth stocks with distant earnings are more sensitive than value stocks
- Financial sector stocks often benefit from rising rates through wider margins
Real Estate and Floating vs. Fixed Rate Debt
- Rising mortgage rates reduce affordability and can slow property appreciation
- REITs often underperform during rapid rate increases but recover over time
- Floating rate debt adjusts with market rates, reducing duration risk
- Floating rate funds can provide income that increases in rising rate environments
Understanding the Yield Curve
- A normal curve slopes upward, longer maturities pay higher yields
- An inverted curve has historically preceded economic recessions
- A flat curve signals uncertainty about future growth and rate direction
- The spread between 2-year and 10-year Treasuries is widely watched
Fed Policy and Market Rates
- The Federal Reserve sets the federal funds rate to influence economic conditions
- Short-term rates follow Fed policy closely; long-term rates reflect expectations
- Quantitative easing and tightening affect bond supply and long-term yields
- Markets often move in advance of actual Fed rate decisions
Positioning for Rate Environments
- Shorten duration to reduce sensitivity when rates are expected to rise
- Extend duration to lock in yields when rates are expected to decline
- Diversify across maturities with a bond ladder to reduce timing risk
- No rate forecast is certain, balance positioning with diversification
- Rate changes affect bonds, stocks, and real estate in different ways
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