How rates and markets are linked
Think of the interest rate as the “rent” on money. When the central bank raises the policy rate, the rent on money gradually rises across the economy: deposit and loan rates, yields on new treasury bills and bonds, everything. Every asset then has to “re-justify” its price, because a higher return is now available with little risk.
A simple rule: an asset whose income is fixed in advance, like a fixed-rate bond, falls in price when rates rise. And assets whose price rests on hopes of future income, like shares, usually come under pressure too. When rates fall, the opposite tends to happen.
Shahana bought a bond last year that pays 10% a year. This year rates have risen and a similar new bond pays 12%. If Shahana wants to sell before maturity, why would a buyer pay full price for a 10% bond when 12% is available? So she has to sell at a somewhat lower price. Meanwhile her brother opens a new FDR this year and earns more interest than before. The numbers are only an example.
Why it matters to an investor
- To understand swings in your portfolio: when bond or share prices move without any company news, interest rates are often a big reason.
- To recognise interest rate risk: if you have to sell before maturity, even a fixed-rate bond can lose money, even a government one.
- To understand timing in saving: after rates rise, new FDRs and savings earn more, though which path suits you depends on your goals and time horizon.
- To understand borrowing costs: higher rates make loans dearer, which affects both demand for flats and land and companies’ profits.
Bonds and treasury bills
Bond prices and market interest rates move in opposite directions: when rates rise, fixed-rate bond prices fall; when rates fall, they rise. The longer the time left to maturity, the more the price moves, because the “penalty” of earning a lower rate lasts for more years.
But if you hold the bond to maturity and the issuer pays as promised, you get the full principal and the promised interest. The price swings are then only on paper. Short-term treasury bills move very little in price with rates, and yields on new bills shift quickly towards the new rate.
Shares, FDRs and other assets
- Shares: higher rates raise companies’ borrowing costs, can reduce consumer spending, and make low-risk savings more attractive. So share markets usually come under pressure, especially companies with heavy debt.
- FDRs and savings: new deposits earn more. But an FDR opened earlier usually keeps its rate until it matures.
- Land and flats: when home loans get dearer, demand can fall, which can slow price rises.
- The taka: higher interest rates at home make holding savings in taka relatively more attractive, which can give the currency some support.
Why it doesn’t always play out the same way
Markets try to anticipate the future. If everyone already expects a rate rise, prices may barely move on the day it is announced, and if rates rise less than expected, prices can even go up. Company earnings, inflation, the exchange rate and investor mood are all at work at the same time.
In Bangladesh, the policy rate was 4.75% from July 2020 to May 2022, then rose in several steps to 10% in October 2024, and was cut to 9.5% in August 2026. During big shifts like this, deposit and treasury bill and bond rates also change noticeably.
Worked example
- A Tk 1,00,000 bond paying 10% a year (Tk 10,000), with 3 years left. With market rates at 10%, its price is Tk 1,00,000.
- Market rates rise to 12%. Discounting the remaining three years of interest and the final principal at 12%, the price comes to about Tk 95,200, roughly 4.8% lower.
- If the same bond had only 1 year left, its price would be about Tk 98,200, only about 1.8% lower. The numbers are only an example.
Result: when rates rise, bond prices fall, and the longer the maturity, the bigger the fall. Held to maturity, though, the full principal and interest still come back.
Common mistakes
- Thinking a government bond has no risk at all. Default risk may be low, but selling before maturity carries price risk.
- Selling everything in panic at news of a rate rise. Markets have often priced the news in already.
- Assuming the link between rates and share prices is mechanical. Other factors often matter more.
- Expecting the rate on an existing FDR to rise with market rates. New rates usually apply to new deposits.
When rates rise, new savings earn more, but bonds bought earlier fall in price and shares come under pressure; the longer the maturity, the bigger the effect.