Interest Rate Spikes Lead to Volatility

So far in 2021, we've seen market volatility driven by the pandemic, the short squeeze of Gamestop and others, and the political environment. Now, add interest rate volatility to the list!

To clarify, we aren't meaning the Federal Funds Rate - rather the interest rates of Treasury bonds and other similar securities. Recently, interest rates have been rising, causing a drop in broad market indices such as the Dow and S&P 500. Typically, when investors are concerned about the stock market, they will purchase "safer" securities such as Treasury bonds. In the short term, when a large amount of these securities are purchased, their interest rates go up and their prices go down. As time goes by, through this buying and selling, interest rates settle in at levels that correspond to expectations on economic growth and inflation.

Short term impacts of rising rates include borrowing costs of individuals and corporations, however rising rates are usually a positive sign for markets once the initial shock wears off. However, are rising rates normal? What does it mean for the clients of SAS?

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