Interest Rates a Rising – How Much Will It Damage the Market?

January 14, 2025

By Robert Wiedemer

Rates Are up Because Bond Buyers Are Tired of Taking a Big Beating

What did I say is the number one issue that’s going to affect the stock market this year? Interest rates -- that’s right. And that’s what’s affecting the market right now.

In particular, the long term rate (10 year) is up half percent in a little over a month to 4.8%. That’s because bond buyers are starting to give up hope that interest rates will be coming down soon. After the Fed meeting in December, it’s becoming increasingly clear that they are not. In fact, the market is now only expecting one rate cut of .25% this entire year.

That means the upside for buying bonds is going down and most of the people who have bought bonds in the last 5 – 10 years are losing lots of money that they may never recover. To put a number on that loss, the ETF TLT, which reflects the value of the 20 year Treasury bond, is down 38% in the last five years and 36% in the last 10 years. Ouchh!

So, as bond buyers pull back from buying bonds, long term interest rates rise. It’s simple supply and demand for money. Less supply of money from buyers means the price (interest rate) goes up.

Stocks Will Recover from This Rate Increase, But Expect More Pullbacks This Year as This Is Not the Last Rate Increase

Stocks always go down when interest rates go up quickly. We’ve had this happen several times in the last two years. And, every time, the stock market has recovered and gone on to record highs. It will again this time.

That’s the good news. The bad news is that this downturn may not be over. Because bond buyers are backing away after getting burned so many times, there is continuous upward pressure on rates. The long term rate could easily go from 4.8% where it is now to 5%. Or even 5.5%.

The only sure bet way to keep rates from rising is for the Fed to stop selling bonds and ultimately start buying bonds with printed money. That will eventually happen, but I don’t see it happening in the next couple months.

Hopefully, bond buyers will come back to the market in the forlorn hope that rates will go down and that will take the pressure off interest rates for now. However, it’s easy to see that this problem will not simply go away. We will face another bout of rising rates this year and pullbacks in the market.

The problem will only go away when the Fed prints enough money to buy enough bonds to keep rates from rising. I don’t know exactly when that will occur, but I can say with confidence that it will definitely happen if rates hit 6%. Hopefully, it will happen before rates go that high. But, until the Fed acts, we will just have to endure these periodic stock market pullbacks.