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How interest rates move markets
Interest rates are often called the gravity of financial markets. When they rise, money in the future is worth less today, so the price of almost every investment adjusts. Move the slider to see how.
2-year bond−1.9%
10-year bond−7.7%
30-year bond−15.4%
New bonds pay the new rate, so old ones must change price to compete. Longer bonds move far more.
Steady company (5% growth)−13.9%
Fast grower (20% growth for 10 years)−16.3%
Higher rates mean a higher discount rate in a DCF. Profits far in the future lose the most value, which is why growth shares fell hardest in 2022.
£200k mortgage, 25 years£1,289/month
Change in monthly payment+£119
£10k in savings earns£450/year
Borrowers lose, savers gain. Mortgage rate assumed 1 point above the base rate, savings 0.5 below.
Key points
- Rates up → existing bond prices down, and long bonds fall most
- Rates up → shares worth less, especially companies whose profits are far in the future
- Rates up → borrowers pay more, savers earn more
- Markets react to expected rate changes, so the surprise matters more than the move itself
Simplified models for illustration: a bond paying 4% a year; businesses valued with a 10-year DCF at the rate plus a 5% equity premium.