What happens if interest rates rise again
Rising rates hurt the assets whose value sits furthest in the future. That is growth companies, long bonds and property, roughly in that order.
Know which of your holdings are secretly a bet on cheap money.
How What happens if interest rates rise again works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
One number, four consequences
A rate is the price of the future. Move it, and everything whose value sits in the future is repriced, which is why growth companies fall hardest.
- 1
A rate is the exchange rate between now and later
Raise it, and money arriving in the future is worth less today. That is not a market reaction, it is arithmetic. Every asset priced on future cash flows gets repriced, and nothing about the underlying business has to change for it to happen.
- 2
Long duration falls hardest, and duration is not just a bond word
A thirty-year bond falls far more than a two-year one for the same rate move. The same logic applies to shares: a company whose profits are almost all expected in the 2030s is a long-duration asset, and it will fall harder than a boring one earning cash today.
This is the entire explanation for why unprofitable growth stocks get destroyed when rates rise and dull cash-generative businesses barely move.
If you hold a portfolio of companies that are all 'the future', you hold a leveraged bet on rates without ever having bought a bond.
- 3
Then it arrives through the economy, with a lag
Mortgages and corporate borrowing get dearer, spending slows, earnings slow. That takes roughly a year to show up, which is why central banks are permanently accused of being late in both directions.
- 4
The positioning is the risk, not the rate
A rate rise that everyone expects is already in the price. The damage comes from a rate path the market was not positioned for. After a long period of everyone expecting cuts, the surprise risk is asymmetric, and it is worth knowing which of your holdings would take it worst.
You can rank your holdings by how much of their value sits more than ten years out.
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Rising rates hurt the assets whose value sits furthest in the future. That is growth companies, long bonds and property, roughly in that order.
Real revenue growth without the multiple that usually comes attached to it.