An interest rate is the price of money over time — what a borrower pays for the use of capital, and what a lender requires to part with it.
Rates matter beyond bonds because almost every asset's value is expressed as future cash flows discounted back to today. Change the discount rate and every valuation changes, whether or not the underlying business changed at all.
Why the discount rate matters so much
The present value of a cash flow received in the future falls as the discount rate rises. The effect is larger the further away the cash flow is.
This produces a pattern worth remembering: assets whose value depends on distant cash flows are more rate-sensitive than assets whose value is realised soon. That is why long-duration equities — companies whose profits are expected largely in the future — often fall hardest when rates rise, even when nothing about their businesses has changed.
The same logic explains why rising rates can hurt an expensive market more than a cheap one: a larger share of the valuation rests on expectations rather than current earnings.
How rates reach each asset class
- Fixed income — directly. Prices move inversely to yields, and duration measures the sensitivity.
- Equities — through the discount rate, and also through the economy: borrowing costs affect profits, and higher rates in the deposit account compete with equity risk.
- Property — through mortgage and financing costs, and through the capitalisation rate applied to rental income.
- Commodities — through the economic cycle and through the cost of carrying inventory.
- Digital assets — no cash flows to discount, but they compete for capital against yield-bearing alternatives, so the opportunity cost is real.
The shape of the curve, not just the level
Markets price a term structure — a different rate for each maturity — not a single number. Three features carry information:
- The level — how expensive money is today.
- The slope — the difference between short and long maturities. An inverted curve, where short rates exceed long rates, has historically preceded slowdowns, though not reliably enough to act on alone.
- The change in expectations — whether the market expects rates to rise or fall, which matters more for prices than where rates are now.
What this means for a portfolio
- Rate moves are not directional good or bad. Rising rates are unwelcome for existing bond holdings but beneficial for reinvested income.
- Duration is a choice, not a default. How much rate sensitivity to carry should follow from the objective, not from a view about the next central bank meeting.
- The same shock reaches different assets by different routes. A rate rise is not one event applied six times; it is six different transmissions that may not arrive together.
Eonvera's research integrates macroeconomic analysis with fundamental and quantitative work precisely because a single variable like this transmits through the whole portfolio at once.