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Market Commentary: Higher Long-Term Interest Rates May Present New Opportunities

Oct 16, 2023 | Billy Fort


This year's rise in long-term interest rates is pushing longer term borrowing costs higher. However, we believe income-oriented investors will find new opportunities in long-term bonds, while strong businesses continue to increase dividends.

Wall Street

A rise in interest rates continues to roil financial markets. However, the rising rates today are different than investors felt last year. Short-term interest rates – a direct result of Federal Reserve Policy – have only moved ¼ of a percentage higher since the spring after a massive move in 2022. But long-term interest rates – typically expressed by the 10-year U.S. Treasury Note – are up significantly over the past 6 months. The 10-year Treasury Note recently hit 4.75%, and it has increased by 1.5% since May. This has caused the interest rate on newly issued debt such as 30-year fixed mortgages to rise to levels not seen since the year 2000. 2 Financial markets continue to be impacted by a rise in interest rates despite the Federal Reserve ratcheting down their increases.

We do not believe long-term investors should fear rising rates. First off, a business with a strong balance sheet can navigate through the environment. Such a company can handle the pressures that may come from higher interest rates, and it can take advantage of competitors who might be feeling the sting of interest costs more acutely. Next, we continue to see high-quality businesses reward shareholders with robust dividend increases. Our team believes a rising income stream creates wealth over the long-term, and companies are paying shareholders more in dividends than ever before. Investors can look to a rising income stream as their North Star during dark and cloudy times in the markets. Lastly, long-term investors may finally be able to buy long-dated bonds again. It has been many years since The Ross Group advocated for investing in long-term bonds. However, the rise in interest rates makes such an investment look much more attractive. Investors are close to having another arrow in their quiver to find the target of financial success.

Our team does not know when interest rates will stop moving higher – and neither do any of the talking heads on television. But we do know how to navigate in such an environment. The lemons provided by higher interest rates can be turned into lemonade by those who can look past the short-term noise to find long-term opportunities.