Headline news that’s worth reading

The era of easy money may soon be over…

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Even the most stoical of investors could be forgiven a spot of collywobbles these days.
 
True, the stock market has been in robust form. The FTSE 100 index of leading shares hit a new all-time high recently, partly propelled by the earnings-boosting impact of a weak pound for our giant multi-nationals.
 
The same cut-price pound that fell in the wake of the EU Referendum has also boosted the sterling value of the non-UK funds and shares that many of us hold in our ISAs and pensions.
 
Can anyone yet say hand-on-heart what impact Brexit will have on our economy? I remain none the wiser.
 
Then there’s the international scene. Europe doesn’t seem to be the basket case it once was, but the idiosyncratic style of the US Tweeter-In-Chief has more than made up for quieter dispatches from Italy and Greece.
 
Oh, and North Korea is testing out long-range missile systems. Just in case you were sleeping too easily!

High ho, high ho

Of course, experienced investors know there are almost always scary headlines out there. It would be hard to sell news without it.
 
More often than not, of course, the eventual impact on the markets is negligible – and certainly hard to pinpoint.
 
As Foolish investors, we concentrate on companies much more than the commotion in the media for this very reason.
 
However, I think there’s a news story of tomorrow fermenting that we should all be aware of – even if we decided that we’re best not taking any action because of it.
 
Readers, I am talking about the long-awaited bond crash.
 
Or, less sensationally, the ‘renormalization’ of interest rates.
 
Or how about just the end of cheap money?
 
It’s hard to know how to define something pundits have talked about for the best part of a decade, but that for years we’ve barely seen a whisker of.

But central bakers around the world suddenly seem to be singing for the same hymn sheet. It’s a muted chorus, sure, but one where the end of QE and interest rates hitting higher notes than in most millennial Fool’s investing lifetimes seems a likely crescendo.

Don’t stop ’til you get enough

Here’s what famed hedge fund manager Ray Dalio wrote recently in a note widely quoted in the press:

For the last nine years, central banks drove interest rates to nil and pumped money into the system, creating abundant cash.
 
These actions pushed up asset prices, drove nominal interest rates below nominal growth rates, pushed real interest rates on cash negative, and drove real bond yields down to near zero percent.
 
This led to more conventional economic conditions in which credit growth and economic growth are growing in relatively good balance with debt growth.
 
That era is ending.

Dalio says central bankers have now clearly told us they intend to take away the punch bowl from the easy money party. The cost of money is rising, or in other words, expect higher interest rates.

Universal bonds

The most immediate and arguably important impact of higher interest rates from central banks would be the impact on bond prices.
 
As interest rates rise, the prevailing yield you can get from bonds that were priced for the rates of yesteryear looks less attractive. As a result, investors sell those bonds, causing their yields to rise too until they’re more in line with the new rate reality.
 
If interest rates continue to rise then, all things being equal, that process continues.
 
I can hear some of you saying: “What do I care about the bond market? I’m an investor in shares!”
 
Right?
 
Wrong. There are numerous ways this could impact the stock market.
 
There are no certainties, but the bond market dwarfs the equity market, and the risk-free rate from high-quality government bonds drives the valuation of all other assets.
 
Warren Buffett says interest rates act like gravity in the markets for this very reason.

Bond’s license to thrill

From the attractiveness of shares versus bonds and cash, to the rising cost of borrowing for companies struggling under too much debt, a sustained rise in interest rates could have consequences for investors of every stripe.
 
So, higher interest rates – while unpredictable – would eventually make themselves felt in all our portfolios.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »