Although meaningful increases in longer-term rates occurred in 2013 and late 2016, it has been a decade since investors experienced a meaningful rising short-term-rate environment. Our latest Ask the Institute report provides useful information for investors.
- Rising short-term rates have a more meaningful effect on the economy because they raise the cost of borrowing.
- Rising long-term rates have a more significant effect on fixed-incomeinvestors because they affect bond prices. Interest rates and bond prices generally move in opposite directions—when interest rates rise, bond prices fall. Rising long-term rates also have a greater effect on homebuyers because they raise mortgage rates.
- We believe that diversification across asset classes and fixed-income maturities and sectors can help investors adapt to a rising-rate environment.