Both Japan and the US raise interest rates, US Treasury yields hit a 24-year high. What happens to stocks, deposits, and loans when interest rates rise?

For the past two weeks, there hasn’t been a day without seeing the words “rate hike” or “rising interest rates” in the news. Both the US and Japan have raised their policy interest rates, and US long-term interest rates have climbed to their highest level in about 24 years.

However, even when hearing that “interest rates have risen,” many people probably don’t intuitively understand how that relates to their own stocks or savings. When I first started investing, I used to skip over news about interest rates as well.

In this article, I will organize what has happened over the past two weeks, summarize how stocks, bonds, deposits, and loans move when interest rates rise, and explain what those who are investing through accumulation plans should do now.

1. What happened in the last two weeks (3 key figures)

First, let’s organize what happened using three figures.

• US policy interest rate: 3.75–4.00%
  The Federal Reserve (FRB), the US central bank, raised its policy interest rate by 0.25% on September 16. This was the first rate hike since 2023, and the vote was unanimous. There are also voices anticipating another rate hike within the year.

• Japan’s policy interest rate: 1.25%
  The Bank of Japan also raised its policy interest rate from 1.0% to 1.25% on September 18 (effective from September 24). This is the second rate hike in three months, following the one in June, and it is the highest level in 31 years, since 1995. However, the decision was split, with 7 in favor and 2 against.

• US 10-year Treasury yield: briefly 5.34%
  After hitting 5.18% on September 24, the highest level since 2007, it rose to as high as 5.34% on October 1, reaching a level not seen in about 24 years since April 2002 (the closing price on the 2nd was 5.24%). This is because the view that the FRB might raise rates further has spread due to the strong US economy and continued inflation.

The “policy interest rate” and “10-year Treasury yield” mentioned here may seem similar, but they are slightly different.

• Policy interest rate: The “benchmark” for interest rates set by the central bank. It affects deposit interest rates and variable-rate mortgages.

• 10-year Treasury yield (long-term interest rate): The yield received when lending money to the government for 10 years. It moves daily based on market buying and selling, and affects stock prices and fixed-rate loans.

The point here is that both of these are rising in both Japan and the US simultaneously.

The atmosphere changed slightly with the employment statistics on October 2

In the US employment statistics for September released on October 2, the number of non-farm payroll employees, which indicates the growth in the number of workers, increased by 29,000 from the previous month, significantly lower than the market expectation (an increase of 84,000). The unemployment rate also rose from 4.1% to 4.2%.

Following this, the probability that interest rates will be kept on hold at the FOMC (the meeting where the FRB decides interest rates) on October 27–28 rose from about 76% the previous day to about 86% (as of the morning of October 2, reported by Zai Online). This is a slight calming down from late September, when the view that there would be “one more rate hike within the year” had suddenly intensified.

However, at the September FOMC, 16 out of 18 participants anticipated at least one more rate hike within the year, and there are views (nearly 30% as of September 24, according to the Nihon Keizai Shimbun) that the Bank of Japan might also raise rates further at its meeting on October 29–30. News about interest rates is likely to continue for a while.

2. What happens when interest rates rise

When interest rates rise, the flow of money changes. Let’s look at four representative examples.

① Stocks: They tend to look relatively expensive

When interest rates rise, it becomes possible to safely earn a certain level of yield even from deposits and government bonds. As a result, more people think, “I don’t have to go out of my way to buy stocks that carry the risk of price declines,” making stocks easier to sell.

Growth stocks (such as high-tech stocks), which are bought with the expectation that they will “earn big in the future even though current profits are small,” are particularly susceptible. Because they rely on future earnings, they tend to look overvalued when interest rates rise.

② Banks: They should become more profitable

Banks earn money from the interest rate spread (margin) by lending out funds collected through deposits to companies and individuals. Since lending rates also rise when interest rates go up, it is generally said that banks become more profitable. This is why it is often said that “if rates rise, buy bank stocks.”

However, this conventional wisdom is not working well this time. I will write about this in detail in Chapter 3.

③ Bonds: Prices fall

What is surprisingly little known is that when interest rates rise, the prices of already issued bonds fall.

For example, suppose you hold a bond with a 3% yield, and a new 5% bond is issued. Since no one would bother buying an old 3% bond at the same price, the old bond’s price drops.

Moreover, the longer the time until maturity, the greater the price drop. In fact, I also hold ultra-long-term US Treasury ETFs in my new NISA, and I am experiencing this firsthand. I have written about that experience here.

④ Deposits and Loans: Deposit rates rise, and loan rates also rise

Closer to daily life, while bank deposit interest rates rise, interest rates on housing loans and card loans also increase. In particular, for variable-rate housing loans, it is common for interest rates to be reviewed a few months after the policy interest rate rises.

3. Why “if rates rise, buy bank stocks” is not working this time

I wrote in Chapter 2 that “banks become more profitable when interest rates rise,” but the situation is a bit different with this current rate hike.

According to the Nihon Keizai Shimbun (September 25), even after the Bank of Japan raised interest rates further, the growth rate of mega-bank stocks has been lower than the Nikkei Stock Average. The reasons cited are as follows:

• Due to the rise in interest rates, the competition for deposits between banks has intensified

• Individual funds are starting to shift from bank deposits to government bonds for individuals

• The government is considering preferential measures for government bonds for individuals, and this trend may strengthen

For banks, deposits are like “inventory.” If they cannot attract deposits without paying high interest rates, their margins will not widen as much as expected, even if lending rates rise.

This means that the simple formula of “rising interest rates equals rising bank stocks” does not always hold true. Since I also hold bank stocks, I intend to keep an eye on this situation moving forward.

4. What people doing installment investments should do

So, what should people who are doing installment investments through programs like Tsumitate NISA do now? I believe there are the following four things.

1. Do not stop your regular investments

When interest rates rise and stocks fall, you might feel anxious and think, “Should I stop for now?” However, regular investment is a method of “averaging out the purchase price by continuing to buy the same amount regardless of whether prices are high or low.” If you stop when prices are falling, you will miss out on the period when you can buy at a lower price.

2. Secure your emergency fund in savings

The reason you can avoid selling in a panic when stocks fall is that you have separate funds for your daily living expenses. Keep several months’ worth of living expenses in savings rather than investing them. Now that deposit interest rates are also rising, you will earn interest little by little just by keeping your money in the bank.

3. Check whether your loan interest rate is “variable” or “fixed”

If you have a mortgage or car loan, check whether the interest rate is variable or fixed. In the case of a variable rate, there is a possibility that your repayment amount will increase during future reviews.

4. See how much of your assets are “sensitive to interest rates”

The following are particularly susceptible to the effects of interest rates:

• Bond funds and ETFs (especially those with long maturities)

• Balanced mutual funds that combine stocks and bonds

• Financial stocks such as banks and insurance companies

• REITs that invest in real estate (because interest payment burdens increase)

Once you check how much of these you have in your portfolio, you will be able to understand “how it affects your assets” when you see the news.

5. Summary

• Both Japan and the US have raised interest rates, and the yield on the 10-year US Treasury note temporarily rose to 5.34%, the highest level in about 24 years

• The October 2nd employment statistics were lower than expected, strengthening the view that interest rates will be held steady at the October FOMC, but interest rate news is likely to continue

• When interest rates rise, stocks (especially growth stocks) tend to look overvalued, and bond prices fall

• It is said that banks become more profitable, but this time, due to competition for deposits, the rise in bank stocks has underperformed the Nikkei Stock Average

• Do not stop your regular investments, check your emergency fund and loan interest rates, and see how much of your assets are “sensitive to interest rates”

Interest rate news feels difficult, but once you understand “where it affects your assets,” you won’t have to panic more than necessary. Start by opening your securities account and taking a look at what you own.

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Disclaimer
This article is intended for general information purposes only and does not recommend any specific stocks or investment decisions. Please invest at your own risk and consult with a professional if necessary.