Interest Rate Effects on Investment Values

Interest rates have an impact on pretty much every asset’s value. We have been in a long period of historically low interest rates and that has played a major part in allowing asset values, especially stocks and real estate, to rise to historic highs. When money is cheap to borrow you don’t care as much about the price when you’re borrowing money. Most borrowers just ask how much down and how much is the payment. That goes for someone buying a car all the way up to corporations borrowing to build a building or a city building a new rec center. Low rates have also allowed corporations to borrow money to buy back their own stock, thereby increasing their P/E ratios and making them look more valuable per share of stock left outstanding.

When interest rates go up that can cause asset values to flatten out or decline. When you think of it, you can’t have increased borrowing costs and increased prices past a certain breaking point of affordability or loan qualification. There comes a point where the payment is increasing because the interest rate is higher so the price gets maxed out quicker in terms of what a person can afford to pay for something. Increased interest rates also come into play on revolving credit lines because they will see increased costs when they refinance that loan at the higher interest rate being charged. That would include corporate debt and even Treasury notes. When I can buy a corporate bond or Treasury at a higher rate next year why would I buy yours that you bought previously when it has a lower rate than I can get otherwise? That means if you own bonds and Treasuries their value will decrease as rates increase because I won’t pay you as much for it since your interest rate is too low.

The good news is that higher interest rates will finally start rewarding people that save. Remember when you could get a savings account that actually paid you good interest income? Those days may be coming back so risk free savings accounts could be a good investment again as well (depending what inflation does of course).

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