After declining for much of 2025, interest rates have started climbing again recently, driven by higher inflation readings, tariff concerns, and the impact of the war in Iran on energy prices and supply chains. Rates have been materially higher for the past four years, and with each passing year, the evidence strengthens that the 2009-2021 period of ultra-low interest rates has ended. Now investors are facing a new question: What if interest rates remain elevated for years to come?
A Return to Historical Norms
Although recent increases in interest rates feel dramatic, today’s levels are not particularly unusual by historical standards. For most of the past half century, short-term interest rates in the United States have typically ranged between 3% and 6%. The near-zero interest rate environment that prevailed from 2009 through 2021 was the real anomaly. In other words, the current environment may represent less of a temporary spike and more of a return to historically normal conditions.
Borrowing Costs Rise
For most people, the most tangible effect of higher interest rates is on borrowing. Mortgage rates, auto loans, credit cards, and corporate borrowing costs all tend to move higher when interest rates rise. This makes large purchases more expensive to finance and can slow economic activity over time.
Housing markets are particularly sensitive to interest rates. When mortgage rates increase, affordability declines for many potential buyers. This often leads to slower home sales and more stable—or even declining—home prices in certain markets. Businesses face similar tradeoffs. Projects that once appeared profitable when borrowing costs were low may look far less attractive when interest rates rise.
In short, higher interest rates tend to cool economic activity, which is precisely why central banks raise them during periods of high inflation.
A Better Environment for Savers
Higher interest rates are not universally bad news, however. For savers, the past four years have produced opportunities that were largely absent for more than a decade. Money market funds, Treasury bills, and high-yield savings accounts now offer interest rates that are significantly higher than they were during the post-financial-crisis era.
In many cases, conservative investors can once again earn positive real (inflation-adjusted) returns on low-risk assets. For retirees who depend on portfolio income, this shift can be particularly important. The ability to earn meaningful income from relatively safe investments may reduce the need to take excessive risk in pursuit of yield.
The Adjustment in Bond Markets
Bond investors have already experienced one of the most visible consequences of rising interest rates: falling bond prices. Because bond prices move inversely to interest rates, the rapid increase in yields during 2022 produced significant losses in many fixed income portfolios, particularly for longer-term bonds.
But there is a silver lining — higher yields today translate directly into higher expected returns for bond investors going forward. When investors purchase newly issued bonds at higher interest rates, the income generated by those bonds becomes a much larger component of total return. Over time, this income can help offset the price volatility that occurs when interest rates move.
What About Stocks?
Stocks can also be affected by interest rates in several ways. Higher borrowing costs may slow economic growth and reduce corporate profitability at the margin. In addition, higher interest rates make bonds more competitive relative to stocks as income-producing investments. As evidence-based investors, we know that public corporations have demonstrated a remarkable ability to adapt to a wide variety of economic conditions. They know how to adjust prices, manage costs, develop new products, and pursue new opportunities. Over the long run, corporate earnings growth has historically been the primary driver of stock market returns—not the level of interest rates alone.
What Does it Mean?
The era of ultra-low interest rates may be behind us, but that does not necessarily spell trouble for investors. Higher interest rates bring both challenges and opportunities. Borrowing becomes more expensive and some asset prices may adjust. But we believe that savers can once again earn meaningful income from conservative investments, and bond yields now offer more attractive long-term return prospects.
As always, the future path of interest rates remains uncertain. Rather than attempting to predict those movements, investors are generally better served by maintaining a well-diversified portfolio designed to perform across a wide range of economic conditions. Markets are constantly evolving, but we find that the principles of disciplined investing remain remarkably consistent.
Disclosure: The opinions expressed herein are those of Elevate Wealth Advisory (“EWA”) and are subject to change without notice. EWAreserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This should not be considered investment advice or an offer to sell any product. Past performance is no guarantee of future results. This contains forecasts, estimates, beliefs and/or similar information (“forward looking information”). Forward looking information is subject to inherent uncertainties and qualifications and is based on numerous assumptions, in each case whether or not identified herein. It is provided for informational purposes only and should not be considered a recommendation to buy or sell securities or a guarantee of future results. EWA is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about EWA, including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.
