Interest Rates Are Rising Again. Here’s What It Means for Investors.
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Before We Talk About Interest Rates, What Exactly Is a Bond?
A bond is essentially a loan. When you buy a bond issued by a government or company, you are lending money to that issuer for a specified period of time. In exchange, the issuer typically agrees to make regular interest payments and return your original investment when the bond matures.
A bond has several basic features:
Par value – The amount the bond is designed to repay when it reaches its maturity date; typically an increment of $1,000.
Coupon rate – The interest rate established when the bond is issued. A $1,000 bond with a 4% coupon, for example, would pay $40 in interest each year.
Maturity – The date when the bond’s life ends and the issuer repays the par value. Bonds can have a wide range of maturities; U.S. Treasury securities, for example, range from a few months to decades in the future.
Once bonds are issued and purchased, bond owners can sell them on the secondary market to willing investors. While the original terms set by the bond issuers generally do not change just because the bond changes hands, what does change is the price investors are willing to pay for that bond in the secondary market. And that’s where bond yields come in.
What Is a Bond Yield?
The yield tells an investor how much return a bond offers based on its current market price. There are different measures of yield, but one commonly used is yield to maturity, which considers the bond’s current price, its interest payments, and the amount repaid at maturity.
Imagine you own a $1,000 Treasury bond paying 4% interest, or $40 per year. Now imagine that newly issued Treasury bonds begin offering 5%. Your existing bond still pays you the same $40. But a new investor has an opportunity to earn more interest by buying a newly issued bond. To make your 4% bond attractive, you would likely have to sell it for less than $1,000. The buyer accepts the lower coupon but gets additional return by purchasing the bond at a discount and receiving the full $1,000 par value when it matures.
This illustrates one of the most important concepts in the bond market: When interest rates and bond yields rise, bond prices generally fall. When yields fall, bond prices generally rise. It’s essentially a seesaw effect.
That inverse relationship is important because it explains how bonds can lose value even though they continue to make their scheduled interest payments.
Why Do We Pay Attention to Bond Yields?
Bond yields are more than just a measure of what investors can earn from bonds. They also provide information about the broader economy and influence borrowing costs throughout the financial system.
U.S. government bond yields are closely watched as an economic barometer. They can influence borrowing costs for businesses and consumers, including longer-term borrowing such as mortgages. The 10-year Treasury yield is particularly useful because it serves as a reference point for many longer-term interest rates.
That means a change in Treasury yields can matter even if you never buy an individual Treasury bond: it can influence the broader cost of borrowing and signal how markets view the economy, inflation, and future interest rates. When investors expect stronger economic conditions or higher inflation, yields can rise; when the outlook changes, yields can move in the other direction.
Where Does the Federal Reserve Fit In?
The Federal Reserve influences the economy in part through interest rates. Its benchmark interest rate is a short-term rate, and changing it is one of the Fed’s primary tools for influencing borrowing, spending, and investment.
When the Fed wants to slow an overheated economy and bring inflation down, it can raise its benchmark rate. Higher short-term rates can increase borrowing costs and reduce spending, which can help cool the economy and, over time, bring inflation down. The opposite is true as well. To stimulate economic activity, the Fed can lower interest rates, making it cheaper to borrow and increase spending activity.
The distinction between short-term interest rates set by the Fed and longer-term bond yields determined by the market is important. The two are closely connected, but they are not the same thing. Longer-term yields are influenced by what investors expect will happen with short-term rates, inflation, and the economy.
What Is Happening with Inflation?
One reason the Fed’s latest move matters is that inflation is still running above its 2% target. The Consumer Price Index (CPI) is a widely followed measure of inflation. It tracks the average change over time in the prices consumers pay for a broad basket of goods and services. The most recent CPI report shows prices up 3.4% from a year earlier, with energy prices up 16.3%.
The Federal Reserve’s preferred measure of inflation is the Personal Consumption Expenditures (PCE) price index. PCE prices were up 3.7% over the prior 12 months.
For investors, the distinction between CPI and PCE is less important than the broader picture: inflation remains above the Fed’s stated 2% goal.
Why Higher Bond Yields Matter Now
The recent rise in interest rates has been difficult for bond investors. As rates climbed, the Bloomberg U.S. Aggregate Bond Index (the “Agg”) – an index representing a broad segment of the U.S. investment-grade bond market – fell nearly 20%, while 10-year Treasuries declined by more than 20%. Those figures include the income generated by the bonds.
But the same increase in rates that caused those short-term losses also pushed bond yields significantly higher. The iShares Core U.S. Aggregate Bond ETF (AGG), a fund that tracks the Agg, now has an average yield to maturity of roughly 5.3%. The Agg was yielding less than 3% for much of the 2010s and below 2% for a significant portion of the early 2020s. That higher starting yield matters because starting yield has historically been a strong indicator of subsequent bond returns, particularly for shorter- and intermediate-term bonds.
Since 1999, a strong relationship has existed between the starting yield on a 10-year Treasury and its subsequent 10-year annualized return: generally, the higher the starting yield, the higher the return that followed. The relationship isn’t perfect, but it becomes even stronger for bonds with shorter maturities and lower duration. Duration measures how sensitive a bond’s price is to changes in interest rates. Generally, the higher a bond’s duration, the more its price will move when interest rates change.
This does not make a 5.3% yield a guaranteed 5.3% return. Interest rates could continue to rise if inflation expectations remain high, putting additional short-term pressure on bond prices. But for intermediate-term bonds, a starting yield around 5% suggests that returns over the next five to seven years could be around 5% per year.
What Does All of This Mean for Stocks?
Higher interest rates do not provide the same straightforward framework for stocks. Future stock returns depend on business fundamentals – such as earnings and dividends – as well as investor sentiment and the valuations investors are willing to pay. While earnings and dividends can be estimated to some degree, valuations are much more difficult to forecast.
That’s why a rate increase isn’t automatically a negative signal for stocks. Higher rates can slow the economy and weigh on markets. But if somewhat higher rates help contain inflation while underlying economic growth continues, the effect can be positive for both stocks and bonds.
Looking ahead, economic growth and productivity are important factors influencing interest rates and Federal Reserve decisions. Artificial intelligence and the labor market are also identified as factors that could play a larger role in the direction of interest rates over the next several years.
The Bigger Picture
The investment landscape today looks very different from the period of exceptionally low interest rates that preceded it. The Fed is raising rates again as it works to bring inflation back toward its 2% goal. Meanwhile, bond yields have risen substantially, creating a much higher starting point for fixed-income investors than they had during much of the previous decade.
The current environment is a good example of why we look beyond individual market headlines. Rising rates have created challenges for existing bondholders, but they have also pushed bond yields to levels that historically have been associated with stronger future returns. At the same time, the implications for stocks depend on the broader inflation and economic backdrop.
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Monthly Changes in Indices
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Monthly Performance By Sector
| Year-to-Date Sector Performance
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Interest Rates: At its September meeting, the Fed unanimously voted to raise its benchmark interest rate by 0.25%. This is the first rate increase since 2023.
Inflation: The Consumer Price Index (CPI) increased 0.4% month-over-month in August. Over the last twelve months, CPI increased 3.4%. Core CPI (which excludes food and energy) increased 0.3% in August compared to July and rose 2.4% compared to a year ago.
Housing: According to the National Association of Realtors, existing home sales decreased 2.0% month-over-month in August and decreased 1.2% from one year ago. The median existing-home sales price rose 1.6% from August 2025 to $429,100. Sales of new single-family houses decreased 10.5% in July from June and fell 6.3% from July 2025. The median sales price of new houses sold in July was $393,800 – a 0.9% decrease from a year ago.
Mortgage Rates: As of September 17th, 2026, the weekly average for a 30-year fixed-rate mortgage is 6.95%, above the 52-week average of 6.35% and up 0.69% from a year ago.
Employment: According to the Bureau of Labor Statistics’ Employment Situation Summary, unemployment was unchanged in August at 4.1%. Employment increased in food services and drinking places and in local government education.
Consumer Sentiment: The University of Michigan’s Surveys of Consumers ticked down 7.5% in September. Compared to its reading from one year prior, consumer sentiment is down 13.2%. Year-ahead inflation expectations jumped from 4.0% in August to 4.6% in September. Long-run inflation expectations ticked up to 3.4%.
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and nationwide with the financial decision-making process to organize, grow, and protect your assets.
** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Any charts and graphs provided are hypothetical and for illustrative purposes only, are not indicative of any investment, and assume reinvestment of income and no transaction costs or taxes.
