What happens when interest rates rise

When the Bank of Canada raises its policy rate, it changes the price of overnight money. Every other price in the economy is downstream of that: bank prime, mortgage rates, corporate borrowing costs, the currency, and the rate at which investors discount future cash flows.

The mechanism, in one sentence

A dollar received in ten years is worth less today when the risk-free rate is higher, so assets whose value sits far in the future fall more than assets that pay cash now.

What typically falls

• Existing bonds: prices move inversely to yields, and the longer the maturity, the larger the move.
• Long-duration equities: unprofitable growth and early-stage issuers whose value is a distant promise.
• Rate-sensitive income vehicles: REITs and utilities, which compete directly with newly higher bond yields and often carry substantial debt.
• Highly leveraged issuers facing near-term refinancing, especially those on floating-rate debt.

What can hold up or benefit

• Cash, money market funds and short-term Treasury bill ETFs, whose yields reset upward within weeks.
• Banks and insurers, at least initially, through wider net interest margins — until credit losses catch up.
• Businesses with pricing power, short cash conversion cycles and little debt.

The Canadian specifics

Canada transmits rate changes to households faster than the United States does, because Canadian mortgages renew on five-year terms rather than being fixed for thirty. A rate cycle therefore reaches Canadian consumer spending — and the earnings of banks, retailers and REITs — through a rolling wall of renewals rather than all at once.

The second Canadian specific is the currency. When the Bank of Canada moves out of step with the Federal Reserve, the rate differential moves the Canadian dollar, and a weaker dollar raises the Canadian-dollar value of commodity revenue for producers who sell in US dollars while paying costs at home.

Expectations move markets, not announcements

Bond yields reprice on the expected path of policy, not on the decision itself. A hike that markets have already priced can be followed by falling yields if the accompanying statement sounds like the last one. Watch the two-year Government of Canada yield: it is the cleanest available read on where the market thinks policy is heading.

How to use this as an investor

• Check the debt note before the earnings headline: how much floating-rate debt, maturing when.
• Ask whether a yield you are being paid is compensation for duration risk, credit risk, or both.
• Remember that a rising short-term rate makes doing nothing a paid option — cash finally earns something.
• Do not position for a specific decision date. Position for a range of paths.