What to Consider Buying & Selling When Interest Rates Drop
As a quick recap, and so we're all on the same page, bond prices have an inverse relationship with interest rates, so when interest rates drop, bond prices rise - more on bonds here. But bonds are not the only ‘interest rate sensitive' investment. Bond proxies are also ‘interest rate sensitive’ - bond proxies are those shares that act like bonds.
Typically interest rates have an inverse relationship with certain industries, i.e. when interest rates drop, stocks in the financial sector will typically underperform.
If your bank makes money by charging you interest, when interest rates drop, they can't charge you as much interest and therefore they don't make as much money. Lower revenue means lower profits, which means lower stock price.
So which stock sectors are set to perform better in a low interest rate environment? Real Estate, Infrastructure, Utilities - low interest rates, mean less debt obligations / less costs, which means more cashflow / more revenue in these industries.
So, when bond yields fall as a result of falling interest rates, this makes the interest rate-sensitive “bond proxy” groups – utilities, real estate etc., among the best sector performers.
Something to consider when interest rates start moving.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
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