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

Interest Rate Risk

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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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What Is Interest Rate Risk?

Duration — Measuring Sensitivity

Impact on Bonds and Stocks

Real Estate and Floating vs. Fixed Rate Debt

Understanding the Yield Curve

Fed Policy and Market Rates

Positioning for Rate Environments

Related Topics

Bond Basics: How Fixed Income Works

Bond Laddering Strategies: Building Predictable Income

High Yield Bonds: Understanding the Risk–Reward Tradeoff

What Is Interest Rate Risk?

Duration — Measuring Sensitivity

Impact on Bonds and Stocks

Real Estate and Floating vs. Fixed Rate Debt

Understanding the Yield Curve

Fed Policy and Market Rates

Positioning for Rate Environments

Related Topics

Bond Basics: How Fixed Income Works

Bond Laddering Strategies: Building Predictable Income

High Yield Bonds: Understanding the Risk–Reward Tradeoff