A mountaineer can increase both climbing success and safety by learning to discern what cloud formations reveal about impending mountain weather. Since the official mountain forecast is little more than an indication of the conditions which “might” prevail over a maximum period of 48 hours, the ability to discern the clouds becomes essential. A knowledge of how interest rates affect asset values is equally valuable for the investor, who can use that information to potentially get positioned in front of money flows. Consider the fundamentals of changing interest rates:
- Time Value of Money: every asset is essentially worth the present value of its future cash flows. This present value is calculated using a discount rate which is heavily influenced by interest rates, which have the following effects:
Higher interest rates → higher discount rate → lower present value
Lower interest rates → lower discount rate → higher present value
When rates rise, future cash flows become less valuable today, and asset prices historically tend to fall. Conversely, when rates fall, future cash flows become more valuable today, and asset prices historically tend to rise.
- Relative Yields: interest rates also determine the baseline return you can get from “safe” assets like government bonds, which creates the following comparison framework:
Higher rates → Treasury yields rise → risky assets less attractive
Lower rates → Treasury yields drop → risky assets more attractive1
- Asset-Specific Effects: Bonds have an inverse relationship to interest rates; when rates rise bonds values drop because new bonds pay more. The future earnings of Stocks are discounted as interest rates rise because safe investments pay more (stocks forced to compete with bonds for investor capital); growth stocks are especially sensitive. Real Estate values historically tend to decline as interest rates rise due to higher mortgage rates, which decreases affordability.
Bond markets are often viewed as a key signal of economic expectations due to bond investors possessing a deep understanding of the effects interest rates have on the Time Value of Money, Relative Yields, and the values of Specific Assets. Strive to ingrain these relational principles into the foundation of your investment paradigm, and then extrapolate them further by understanding rates don’t need to change to impact asset values, they merely need to surprise expectations. Consider that recently the stock market was thought to have already “priced-in” two additional 2026 Fed rate cuts; what effect would zero additional 2026 rate cuts have on Treasuries? Bonds in general? Stocks? Real Estate? Commodities? Collectibles? Why?
God bless your wealth-building and financial planning efforts as you deepen your understanding of the effects interest rates have on every financial factor.
Shaun
“Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe” ~Warren Buffet
“You ought to have invested my money with the bankers, and at my coming I should have received what was my own with interest.” ~Matthew 25:27
1 Stansberry Research, Daily Wealth, “One Thing That Powers Everything in Finance”, Doc Eifrig, April 9, 2026
Disclosure(s)
This material is provided by Old Forge Wealth Management, LLC (“Old Forge”) for informational and educational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. This commentary is general in nature and does not take into account the specific investment objectives, financial situation, or needs of any individual. The views expressed are those of the author as of the date of publication and are subject to change without notice. Any forward-looking statements or expectations are based on current assumptions and are subject to change. All investments involve risk, including the potential loss of principal. Past performance and historical relationships are not indicative of future results. Information contained herein is derived from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Old Forge Wealth Management, LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. This content is not intended to create, and receipt of it does not constitute, an advisory relationship.