How Interest Rates Affect Your Investments

Interest rates rise and fall for many reasons. Knowing what’s driving those changes can help you keep perspective when shifting rates impact your investments.

What are interest rates?

Simply put, interest rates are what someone earns for lending money or pays when borrowing it. They show up in all kinds of places — from a savings account to a mortgage, a credit card to a student loan. When rates are low, borrowing is cheaper and spending tends to rise. When they’re high, borrowing slows and saving looks more appealing.

Why do interest rates change?

Central banks, like the Bank of Canada (or the U.S. Federal Reserve), adjust the short-term interest rate they control — known as the policy rate — to guide the economy. When inflation is running high, they may raise rates to make borrowing more expensive, slowing down spending and easing price pressures. When growth is sluggish, they may lower rates to encourage businesses to invest and consumers to spend.

That said, central banks only directly control the very short-term policy rate. The interest rates you see in the real world — like mortgage rates or credit card rates — are set by financial institutions, based partly on the central bank’s policy rate and partly on what’s happening in broader financial markets. Investors and lenders can both influence longer-term borrowing costs, which can move independently of the central bank. For example, strong demand for bonds can drive their yields — the interest rates they offer — lower, even if the policy rate stays unchanged.

Rates can also shift in response to global events, currency movements, or unexpected disruptions.

Why interest rates matter for your investments

Interest rates aren’t just numbers set by central banks — they shape the cost of borrowing, the value of bonds, and even how stocks are priced. When rates change, the effects ripple through nearly every corner of your portfolio. Understanding how and why this happens can help you see the bigger picture and stay confident through market shifts.

How interest rates affect different investments

For bonds, interest rates are a major factor in how they’re priced. When rates rise, the market price of existing bonds typically falls because newer issues offer higher yields. When rates decline, the opposite occurs: existing bonds become more valuable, since their fixed payments look better than what new bonds can provide. Longer-term bonds usually react more sharply to rate changes than short-term bonds.

Stocks also respond to interest rates, though in different ways. Higher rates can weigh on company profits by raising borrowing costs and by cooling overall economic growth, both of which can put pressure on stock valuations. Some industries, such as financials, may partly benefit when rates rise, while others, like real estate, often face more headwinds. On the other hand, lower rates can give stock markets a boost. Growth-oriented companies especially may benefit from cheaper borrowing, while dividend-paying stocks can become more attractive as bond yields fall — offering a potential alternative for income generation.

Other assets, such as real estate, commodities, and currencies, also feel the influence of interest rates. For most everyday investors, however, the clearest effects show up in the market prices of their bond and stock holdings.

What happens to stocks and bonds in different rate environments

Interest rates can move in different directions, and each scenario creates a different backdrop for investing.

Rate environment	Impact on bonds	Impact on stocks
Rising rates	Existing bond prices tend to fall; new bonds offer higher yields	Borrowing costs increase; growth companies especially may come under pressure
Falling rates	Existing bond prices tend to rise; new bonds offer lower yields	Lower borrowing costs often support valuations; growth companies may especially benefit, and dividend stocks can look more attractive as bond yields decline
Volatile/ uncertain rates	Bond prices can fluctuate quickly	Dividend-paying or defensive stocks (like utilities or consumer staples) may hold up better

Key takeaways

Interest rates shift for many reasons — sometimes to slow the economy, sometimes to give it a boost. While these moves can create ups and downs in markets, the way different investments respond tends to follow a familiar pattern: rising rates often put pressure on the market prices of both stocks and bonds, while falling rates usually provide support. By knowing why rates change and how different types of investments tend to react, you can better understand what’s happening in your portfolio and stay focused on your long-term plan.

How interest rates affect your investments