What was the highest interest rate for U.S.Treasury Bills?

In 1981, the interest rate for three-month U.S. Treasuries hit an all-time high of 14.03%. Since this period, interest rates have fallen to their present-day rate of approximately 1%.

What is the relationship between the interest rate and the stock market?

The relationship between the prevailing interest rate and the stock market is not a simple correlation, but is rather complex when considering all the different types of investments. For example, experts believe that as interest rates increase, bond prices tend to decrease. This generally makes bonds a less attractive investment than stocks, because the previously higher-earning bond is now lower in value. And as interest rates increase, they may lead many in the investing community to believe they should invest in stocks, since many investors may believe they can earn more return if the same dollars are invested in stocks rather than bonds. In this scenario, since more buyers than sellers are now entering the equity market, it may increase stock prices, making the stock market climb.

What may happen to the stock market if interest rates decline?

As interest rates decline, the costs of borrowing and credit become cheaper for both individuals and corporations. Accordingly, consumers may finance more purchases with credit, and corporations can borrow necessary capital more cheaply. These factors may affect their bottom-line profits, further supporting the ever-increasing stock market.

Why might it be true that as interest rates rise, the stock market may not necessarily fall?

Experts cited in a recent New York Times article believe we must review the rationale behind increasing interest rates, yet not draw too many conclusions based simply on the fact that interest rates have increased, and their projected effect on the stock

The U.S. Treasury Department is headquartered in Washington, D.C. It is charged with managing the country's financial resources and protecting the integrity of the financial system.

The U.S. Treasury Department is headquartered in Washington, D.C. It is charged with managing the country's financial resources and protecting the integrity of the financial system.

market. Much of the reason for this has to do with perceptions as to why we are increasing interest rates. In May 2013, interest rates ticked up, yet the NYSE still managed to trend upward. Investors may perceive that improving interest rates may signal the end of an easing strategy by the Fed, and perhaps less risk of deflation, both thought to be good signs for equity investors. But it is important to note that if interest rates hit a certain threshold, the opposite scenario may in fact happen. If the interest rates increase beyond a certain point, and more expensive credit makes it more difficult to obtain mortgages or purchase larger-ticket consumer items, causing more softness in the economy, it would begin to have a deleterious effect on the stock market, and may cause it to trend downward. If the markets perceive climbing rates as indicative of the return of an inflationary period, it may also weaken stock prices and demand for stocks.

What is the threshold interest rate that seems to signal a decline in the broad stock market?

The New York Times experts—some of whom studied the correlations between equity prices and bond yields of U.S. Treasuries over many periods—found that the threshold interest rate that seems to signal a decline in the broad stock market is approximately 6%. One expert believes the reason for this is because equity investors would be quite nervous if the cost of long-term capital equals an economy's nominal long-term growth rate. Some would argue that if returns on less risky investments such as government bonds are sufficiently high, it would naturally pull investors from higher-risk equity investments.

Looking back more recently, what effect has the increase in interest rates had on the stock market?

For the period June 2004 to June 2006, the Fed raised interest rates 17 times, yet the stock markets did very well, rising 11.3% (S&P 500) and 22.5% (Russell 2000).

If interest rates increase, does this harm bank stocks and financial sector stocks?

Some experts agree that as interest rates rise, banks and some financial stocks may make more profits, as they are able to loan more expensive money and pass the increases in the price of borrowing to their clients. Other experts see rising interest rates as harmful, as they may stifle demand for credit and cause a slowing effect on profits. In the example of rising mortgage interest rates, increases may make many people refinance at a higher rate, which is better for the lender's profits, but may stifle demand for new mortgages. Higher interest rates may also be passed on to millions of consumers who use credit cards, effectively generating more profit for credit card issuers as well.

 
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