Rising interest rates generally push down the market price of stocks, bonds, and real estate, while falling rates lift them. That is the short version of how interest rates affect stocks, bonds, and real estate: higher borrowing costs make future cash flows worth less today, make existing fixed-rate bonds less competitive, and shrink what buyers can afford to pay for a house. The Federal Open Market Committee holds the federal funds rate target at 3.5%–3.75% as of early 2026, and that single benchmark sets the gravity for every asset tied to future money.
Bonds: The Most Direct Relationship
Bond prices move opposite to interest rates, and the math is mechanical. When rates rise, newly issued bonds pay higher coupons, so older bonds with lower fixed coupons have to drop in price until their effective yield matches the new market rate. The SEC gives a clean illustration: a bond bought at $1,000 face value with a 3% coupon falls to roughly $925 when market rates climb to 4%, because the lower price pushes the yield to maturity up to the new market rate.1SEC.gov. Interest Rate Risk – When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall
How badly a particular bond gets hit depends on how long it has left until maturity. Bond professionals measure this sensitivity with “duration,” a number that approximates the percentage price change for each one-percentage-point move in rates. A bond with a duration of 10 would lose roughly 10% of its value if rates jumped by one point.2FINRA. Brush Up on Bonds: Interest Rate Changes and Duration That is why a 30-year Treasury swings far more than a short-term Treasury bill. Bills, with maturities of a year or less and a minimum purchase of $100, barely budge by comparison.3TreasuryDirect. Treasury Bills
A practical consequence: in a rising-rate environment, long-dated bond funds can post losses that look nothing like what most people picture when they think of bonds as “safe.” The safety is in the credit (you still get paid), not in the market price along the way.
Stocks: Discount Rates and Which Companies Get Hit Hardest
A stock price reflects what the market thinks a company’s future profits are worth today. Analysts translate those future profits into a present value using a discounted cash flow model, and the interest rate is a core ingredient of the discount rate in that calculation. When rates rise, the same dollar of projected future profit is worth less in today’s terms. A company expected to generate most of its earnings five or ten years out takes a much bigger valuation hit than one earning strong profits right now.
This is why growth stocks, particularly in technology, tend to sell off sharply during rate-hiking cycles. Their valuations rest almost entirely on projected future cash flows, and a higher discount rate compresses those projections hard. Established companies with steady current earnings and modest debt handle rate increases more comfortably, because the math behind their stock price is anchored to cash coming in today rather than promises about 2035.
There is a second channel. Higher rates make bonds and savings accounts more competitive with stocks on a yield basis. When an investor can earn 4% or 5% on a government bond with no principal risk, some of them see less reason to accept stock market volatility, and the equity risk premium shifts. Money leaves stocks on the margin, and valuations adjust downward.
Real Estate: Affordability Shrinks
Real estate is one of the most interest-rate-sensitive asset classes because almost every purchase involves borrowed money. When the Fed raises rates, mortgage lenders follow, and the effect on a buyer’s monthly payment is immediate. Federal law requires lenders to disclose the annual percentage rate on every consumer credit transaction, so borrowers can see the true cost of the loan.4Office of the Law Revision Counsel. 15 USC 1638 – Transactions Other Than Under an Open End Credit Plan A one-percentage-point jump on a $400,000 mortgage can add hundreds of dollars to the monthly payment, which effectively shrinks how much house a buyer can afford. Multiplied across millions of buyers, that reduced purchasing power cools demand and puts downward pressure on home prices.
If You Already Have an Adjustable-Rate Mortgage
Borrowers with adjustable-rate mortgages feel rising rates personally once the initial fixed period ends. The rate then resets based on a market index. Federal rules require ARMs to include caps that limit how fast the rate can move: the first adjustment is capped at two to five percentage points, each later adjustment at one to two percentage points, and the lifetime cap is most commonly five percentage points above the starting rate.5Consumer Financial Protection Bureau. What Are Rate Caps With an Adjustable-Rate Mortgage (ARM), and How Do They Work? Those caps help, but a five-point lifetime cap on a loan that started at 3% still leaves room for the rate to reach 8%, which transforms the monthly payment.
REITs Have a Structural Vulnerability
Real Estate Investment Trusts are a common way to own real estate without buying property directly, and they carry a built-in weakness to rising rates. The Internal Revenue Code requires a REIT to distribute at least 90% of its taxable income to shareholders to keep its tax-advantaged status.6Office of the Law Revision Counsel. 26 USC 857 – Taxation of Real Estate Investment Trusts and Their Beneficiaries That mandatory payout leaves little retained earnings to pay down debt, so most REITs carry substantial leverage. When borrowing costs climb, interest expense eats into the income available for distribution. At the same time, REIT dividends have to compete with rising yields on safer government bonds. If a Treasury pays close to what a REIT pays, the incentive to hold the riskier asset weakens and investors sell.
Nominal Rates vs. Real Rates
The rate quoted on a bond or savings account is the nominal rate, but what actually determines your purchasing power is the real rate: roughly, the nominal rate minus inflation. A savings account paying 5% sounds appealing until you notice that 4% inflation is eroding most of that return. Economists capture this with the Fisher equation, which approximates the real rate as the nominal rate minus inflation.
When the Fed raises nominal rates faster than inflation rises, real rates turn positive and borrowing becomes genuinely expensive in purchasing-power terms. That is when asset prices feel the most pressure. When inflation runs ahead of rate hikes, real rates stay negative and cash in a savings account still loses value despite the higher headline yield. Watching real rates, not just the quoted number, is what separates a reaction to a Fed announcement from a view on what it actually means for your portfolio.
What Savers and Investors Can Do When Rates Are High
The flip side of expensive borrowing is better compensation for savers. High-yield savings accounts, certificates of deposit, and money market funds all pay more when the baseline rate climbs. CDs lock in a fixed rate for a set term, and withdrawing early triggers a penalty, so they work best for money you won’t need in the near term. Money market funds invest in short-dated government and corporate debt and pass higher yields through to investors almost immediately.
Series I Savings Bonds
Series I savings bonds combine a fixed rate set at purchase, which never changes for the life of the bond, with a semiannual inflation rate that adjusts every six months based on the Consumer Price Index. Bonds issued from January through April 2026 carry a fixed rate of 0.90% and a semiannual inflation rate of 1.56%.7U.S. Treasury Fiscal Data. I Bonds Interest Rates One limitation worth planning around: you can purchase no more than $10,000 in electronic I bonds per person per calendar year.8TreasuryDirect. I Bonds
Treasury Inflation-Protected Securities
For larger amounts, Treasury Inflation-Protected Securities serve a similar inflation-hedging purpose and trade on the open market with no annual purchase cap. The principal of a TIPS adjusts up with inflation and down with deflation based on the Consumer Price Index, and the bond pays a fixed coupon on that adjusted principal. At maturity, you receive the inflation-adjusted principal or the original face value, whichever is greater.9TreasuryDirect. TIPS Because the principal itself grows with inflation, TIPS lock in a real return above inflation, which is especially useful when inflation runs high.
Tax Angles That Change the After-Tax Math
Interest income from savings accounts, CDs, and most bonds is taxed as ordinary income at your full marginal rate. That means a sizable chunk of a higher yield goes to the IRS, particularly for higher earners, so a 5% CD may deliver closer to 3.5% after taxes.
REIT dividends get a partial offset. Under Section 199A of the Internal Revenue Code, individual taxpayers can deduct up to 20% of qualified REIT dividends, effectively lowering the tax rate on that income.10Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income To qualify, the dividends cannot be capital gain dividends or qualified dividend income, and you must hold the REIT shares for at least 46 days.11eCFR. 26 CFR 1.199A-3 – Qualified Business Income, Qualified REIT Dividends, and Qualified PTP Income Unlike some other pieces of Section 199A, this deduction is not phased out at higher income levels.
TIPS and I bonds carry a quirk to plan for. The inflation adjustment to principal is taxable in the year it occurs, even though you don’t receive the cash until the bond matures or you sell. That phantom income can create a tax bill on money you haven’t pocketed yet. Many investors hold TIPS inside a tax-advantaged retirement account to avoid the problem, which is worth considering if you’re building a meaningful inflation-protected bond position.