US interest rate changes

What can happen if the US interest rate goes up?


From the US perspective:

I. If US interest rate go up, it is usually seen bonds with the lowest coupons and longest maturities will most certainly decline in value. These bonds are most susceptible to price declines, as the principal won't be repaid for a long time and the low coupon does little to offset the rise in rates.

II. Higher yields will push up long-term borrowing cost for U.S. consumers and businesses. Mortgage rates will rise.

III. One should also think from the perspective of interest repayments on the national debt the US will have to make if they raise the interest rate and how in turn it can affect the growth of the economy.

IV. Usually it has been seen that investors in shares and bonds don’t like it when interest rates are raised. It increases the attractiveness of government bonds and suppresses demand for corporate stocks and bonds. In addition, a return to rising interest rates could hurt a number of publicly-traded companies and affect their ability to borrow money and increase their financing costs.

V. Rising rates would particularly hurt highly-leveraged companies that rely on regular credit and could also harm the real estate sector, including developers and construction firms. But not all companies are created equal. Just as increased interest rates hurt businesses that rely on credit, it could help companies that provide credit, first and foremost the banks.

 From the Global perspective:

I. It can lead to capital outflows from emerging markets and in turn put pressure on emerging market currencies. So, it can lead to rupee depreciation.

II. Unhedged dollar liability by the corporates in the emerging markets can increase due to increase in LIBOR rates and also due to possible depreciation in their respective currencies.

III. US Dollar being the global currency as well as a currency with low borrowing cost (interest rates), global fund managers have borrowed in the US Dollar to invest overseas. Incase interest rate rises in the US, and the US Dollar prices move higher, it will be unremunerated for the money managers to borrow further in Dollar to invest overseas. This reduction in demand for borrowing is known as the reversal of carry trade.