Interest rates are one of the most influential forces shaping financial markets. When rates rise—often in response to inflation or strong economic growth—the impact ripples the entire economic market. For investors, the challenge isn’t predicting rate moves, but positioning portfolios to manage risk while seeking to capture new opportunities.

Understanding the shift

Rising interest rates increase borrowing costs for companies of all sizes. Higher rates reduce the present value of future cash flows, which can pressure asset prices—particularly those dependent on long-term growth projections.

At the same time, higher rates may improve yields on cash and fixed-income instruments, creating new sources of potential income that are traditionally absent during a low-rate era. Because of these market shifts, rising interest rates may signal the need for a shift in investments.

Fixed income investments: focus on duration and flexibility

Bond markets are directly affected by rising rates. As rates increase, existing bond prices fall because newer bonds offer higher yields.

To manage this risk, investors often reposition their fixed-income exposure:

• Shorten duration: Short-term bonds are less sensitive to rate increases and help preserve capital.
• Use bond laddering: Staggering the timing of maturities allows reinvestment at higher yields over time.
• Pursue higher quality: Investment-grade and securitized bonds tend to offer investors less credit risk while earning higher yields when rates increase.
• Consider floating-rate or Treasury inflation-protected securities (TIPS). Floating rate bond coupons periodically reset higher as interest rates rise, helping earnings keep pace with changing market conditions. And TIPS are Treasury bonds where the principal value adjusts based on changes happening in the Consumer Price Index (CPI), therefore the bond’s value increases as inflation rises.

Also consider U.S. Treasury securities, which now provide higher income than in the recent past. For example, the widely tracked U.S. Treasury note with a 10-yr maturity now yields 5.01% vs.  4.11% one year ago¹. Treasury securities may be considered lower risk, as their coupon payments (interest) and face value (principal value that is paid at a bond’s maturity date) are backed by the full faith and credit of the government.  

Treasury bonds do have interest rate risk, however, and their prices will fluctuate based on multiple factors, including what the Fed does with short-term policy rates and investors’ expectations about the future path of inflation. It is generally true that bond prices will move inversely to interest rates, which can create challenges as rates rise.

The key is not abandoning fixed income, but optimizing it for a higher-rate environment where income opportunities may be improving.

Equities: Rotate toward resilience and income

Rising rates tend to compress equity valuations, especially for growth stocks that rely heavily on future earnings.

In response, many investors shift toward:

• Value-oriented companies with stronger current earnings
• Dividend-paying stocks that provide income alongside growth
• High-quality businesses with strong balance sheets and pricing power

Before making changes, investors should consider their risk tolerances and long term investing plans to ensure changes continue to reflect their goals.

Sector positioning becomes especially important. Historically, certain sectors showed relative strength when rates rise, while others often lag:

• Energy, industrials and materials often benefited because they were closely tied to economic growth, inflation and higher commodity prices
• Financials may have seen improved lending profitability when interest rates moved higher
• Utilities, real estate, consumer staples and health care tended to lag as higher bond yields in other fixed income sectors increased competition for investor capital

Rather than exiting equities, the focus shifts to quality, profitability and resilience. In the below chart, returns are total annualized returns, including dividends.

Cash and short-term instruments

In a rising rate environment, cash may be less of a drag on performance. Money market funds, Treasury bills and high-yield savings vehicles may offer competitive income opportunities, depending on market conditions.

This creates new flexibility:

• Provides liquidity that may be available for future investment opportunities
• Can serve as a stabilizing allocation within a diversified portfolio. While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.
• May provide income potential while emphasizing liquidity and capital preservation

For many investors, cash becomes an intentional allocation rather than a residual one.

Rising interest rates are often viewed as a challenge, but they may create meaningful opportunities for investors. By emphasizing higher-quality fixed income, focusing on resilient equity investments, and maintaining a diversified portfolio, investors may be better positioned to manage risk while benefiting from the higher income potential that often accompanies a rising-rate environment. The key is not to react emotionally to rate increases, but to make thoughtful adjustments that align with long-term investment objectives.

Before making a change in your investment portfolio, you may wish to consult with a financial professional to determine how that may align with your long-term goals and objectives.

¹ As of 9/18/2026 and 9/18/2025, respectively. U.S. Federal Reserve