How does "interest rates" go up? And what exactly are the probable causes on a set of your investments.?

Answer 1

Interest rates are set by the Federal Reserve in the U S. They are set by other central banks in other countries. In general the Fed will raise interest rates to mitigate inflation. With higher interest rates, people will hopefully tend to borrow less money and slow their purchases wich will slow down inflation.

Higher interest rates in general are not good for investments in either stocks or bonds. If one owns bonds higher interest rates drop the value of the bonds that are already owned. If one owns stocks, higher interest rates tend to reduce the earnings power of the underlying companies and cause the prices of the stocks to fall. Look at what happened in 1976-1982 when interest rates were 14%. Stocks did terrible.

Answer 2

First -- interest rates are not set by the Federal Reserve -- they are set by the Market. The Fed is a big player in the market -- and attempts to set the discount rate -- which is a short term interest rate. The Fed acts in consort with the Market -- and if the Market doesn't like what they are doing, they set rates to something else.

Interest rates are set by the supply and demand of bonds. Increased demand (or decreased supply) causes rates to drop. Decreased demand (or increased supply) causes rates to rise.

The next obvious questions is -- what causes changes in supply and demand. During good times, companies would rather invest in their own operations, so demand for funds increases but so does supply. Rates could go either way -- depending on how much is being raised.

If a recession is feared, companies will not put money into their operations, and demand for middle maturity treasury bonds increases (often causing a flattening of the yield curve).

Someone has already pointed out that when expected inflation increases, rates will rise. This is because people will demand a higher return for taking on this inflation risk.

The supply side also has an effect. Republican presidents often run up large deficits -- which means that the government is borrowing more in order to pay for the cost of governing. This increases the supply of bonds -- which increases interest rates.

The effect of increasing rates is that bonds become cheaper. Those about to invest benefit and those who are already invested are the losers.

Answer 3

Genrally Interests rates go up when inflation is high which means people have more money to spend. When interest rates are increased, people start investing more because they get more return on investment.Stock markets boom when interest rates are hiked.

Answer 4

When profits and therefore stocks go up...There are more interest/money in stocks which depresses bond prices which nets an increase in interest rates.