How will our lives change when global interest rates rise? Basic knowledge to protect your NISA and mortgage
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Recently, you may have seen terms like “long-term interest rates rising” or “US Treasury yields surging” in the news more often.
Honestly, the topic of interest rates feels a bit difficult, doesn’t it?
Some might think it’s only a concern for stock and currency traders and has nothing to do with them.
However, that is actually not the case.
When global interest rates move, it affects the investment trusts and stock prices held in your NISA, your mortgage, and even the value of the yen and the dollar.
Especially in the current climate, where inflation and the fiscal problems of various countries are being closely watched, understanding interest rate movements is important for protecting your assets.
In this article, we will break down the background of rising global interest rates into three factors and consider what we, as individual investors, should be checking.
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To begin with, why is there such a fuss when interest rates rise?
Interest rates are the cost paid when borrowing money and the return received by the lender.
They also serve as a benchmark for the entire economy.
For example, if interest rates rise, it becomes harder for companies to borrow money.
Upward pressure is also applied to fixed-rate mortgages.
In the stock market, the valuation of future earnings changes, which can be a headwind, especially for stocks with high growth expectations.
In other words, interest rates are not just an issue for investors.
They are figures that affect both those who borrow money and those who invest it.
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Three factors pushing up global interest rates
When considering the current rise in interest rates, there are three things to pay attention to.
The first is that inflation is not easily subsiding.
When crude oil prices rise due to geopolitical risks such as the situation in the Middle East, the impact spreads to overall prices through gasoline, transportation costs, and electricity bills.
If prices continue to rise, investors will feel that the interest from government bonds is not enough to earn a sufficient profit, and they will begin to seek higher yields.
The second is that the behavior of investors buying US Treasury bonds is changing.
US Treasury bonds are representative financial assets held by investors all over the world.
However, if the trends of major holders or the asset management policies of various countries change, it will affect the supply and demand of US Treasury bonds.
If the number of buyers decreases, higher yields may be required to get people to buy the bonds.
The third is anxiety regarding US fiscal policy.
If the government’s debt continues to grow, the market will start to worry about whether it can continue to pay interest in the future.
If anxiety about fiscal health intensifies, investors will demand yields that match the risk of holding government bonds.
The combination of these three factors creates an environment where long-term interest rates are likely to rise.
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What is the impact on NISA and mortgages?
First, for those who are accumulating S&P 500 or All Country World Index (eMAXIS Slim) funds in their NISA, it is worth knowing that rising interest rates can be a drag on stock prices.
When interest rates rise, corporate borrowing costs increase, which can squeeze profits.
Also, the higher the expectations for a company’s future earnings, the more likely its stock valuation will fall due to rising interest rates.
On the other hand, for mortgages, the impact differs between fixed and variable rates.
Fixed rates are easily influenced by movements in long-term interest rates, while variable rates are mainly influenced by short-term interest rates and monetary policy.
Therefore, just because global long-term interest rates have risen does not mean that all mortgage rates will immediately rise in the same way.
The important thing is to understand which type of interest rate your contract is subject to.
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