Interest Rates Are Rising
But what really matters to long-term investors?
The US Federal Reserve recently raised interest rates for the first time in three years. Will rates rise further, and should investors worry about interest-sensitive investments such as REITs, utilities and growth companies? These questions matter, but interest rates are rarely the most important determinant of long-term investment returns.
Warsh and a different approach
Kevin Warsh became Federal Reserve chairman in 2026. We view him as a pragmatic inflation hawk – someone prepared to raise rates if inflation remains persistent.
The Fed’s preferred headline inflation measure stayed above its 2% target for 65 consecutive months from March 2021 through July 2026. Following September’s rate increase, 16 of the 18 Fed policymakers expected at least one more increase in 2026. The median projection suggests another hike by year-end, possibly in December. However, these projections are forecasts, not commitments. Warsh himself did not submit a forecast to the Fed’s dot plot.
Warsh has also moved away from forward guidance, where the Fed provides clues about its future decisions. It is like a driver who no longer announces every turn in advance.
Markets must study economic conditions and draw their own conclusions. This gives the Fed greater flexibility, but it may also cause interest-rate expectations to fluctuate more sharply after each inflation report or geopolitical development.
How interest rates affect investments
Interest rates generally affect investments through two channels: valuations and financing costs.
Valuations
When investors value a company, they estimate its future cash flows and translate them into today’s value. Higher interest rates make future profits worth less today, which can reduce the valuations of property, utilities and growth companies.
However, the Fed directly influences short-term interest rates, while asset valuations are more closely linked to longer-term rates such as the 10-year Treasury yield. Long-term yields are determined by inflation, economic growth, government borrowing and market expectations.
A Fed rate increase therefore does not automatically cause long-term yields to rise. If investors believe higher short-term rates will control inflation or weaken the economy, long-term yields may even fall. Indeed, after September’s rate increase, short-term Treasury yields rose while longer-term yields initially declined.
Financing costs
Companies with debt eventually need to refinance it. This resembles a homeowner whose fixed-rate mortgage expires: higher rates may not affect the existing loan immediately, but they matter when it must be renewed.
REITs and utilities are particularly exposed because they own large properties and infrastructure financed partly with debt. However, the effect depends on each company’s leverage, debt maturity schedule, hedging and ability to raise rents or regulated returns. A conservatively financed company with long debt maturities and growing income can manage higher rates much better than a heavily indebted company facing imminent refinancing.
Where could rates go next
The US 10-year Treasury yield was approximately 4.9% on 22 September 2026, after recently exceeding 5%. Bloomberg consensus forecasts suggest that it could decline towards 4.6% by end-2026 and remain around that level in 2027. These forecasts are useful reference points, not certainties.
Yields could fall if inflation moderates, energy prices decline or economic growth slows. They could remain elevated if inflation persists, governments continue borrowing heavily or investors demand greater compensation for holding long-term bonds.
The Iran conflict is an important variable because of its impact on oil prices. Nevertheless, tariffs, government deficits and strong investment demand – including spending on artificial intelligence – also influence inflation.
Our base case is therefore that rates, especially longer-term ones, could be peaking but it will remain structurally high.
What this means for our investments
REITs and utilities
REITs and utilities are sometimes treated as bond proxies because investors value their relatively stable dividends. When government bond yields rise, investors demand higher yields from these companies, usually causing their share prices to fall. Lower prices, however, can also create attractive entry points.
Singapore REITs currently offer a yield spread of approximately 3.8% to 4.0% above 10-year Singapore government bonds. This appears attractive compared with recent history and buying Singapore REITs now could allow investors to lock in the higher yield while interest rates are high. However, their share prices could remain volatile while interest rates are seeking their level to settle.
Utilities also face higher financing costs, but selected companies could benefit from structural growth in electricity demand, grid investment and data centres. The important question is whether they can earn adequate returns and pass higher costs to customers or regulators.
AI-related companies
Growth companies are theoretically sensitive to higher long-term rates because much of their value comes from future profits. Yet leading AI-related companies have remained resilient. Their improving business prospects have so far outweighed the effect of higher discount rates.
It is like a shop whose rent rises by 10% while its sales double. The higher rent matters, but it is no longer the main part of the story. For AI companies, sustainable demand, competitive advantages and successful monetisation will matter more over time than modest changes in interest rates.
Banks
Banks can benefit from higher rates because they may earn a wider difference between the interest charged on loans and paid on deposits. But if rates rise too far, loan demand may weaken and credit losses may increase. Banks perform best when rates are reasonably high, economic growth remains healthy and borrowers can continue servicing their debts.
What matters most
Interest rates and geopolitical developments can move markets significantly over shorter periods. But investors should not confuse what moves share prices today with what creates wealth over many years.
Interest rates are the weather. They can make the journey easier or more difficult, but they do not determine the destination.
Our greater focus is on durable structural trends such as artificial intelligence, robotics, ageing populations, healthcare demand and modernisation of power grids. We then seek financially strong, well-managed companies with durable competitive advantages that can benefit from these trends.
We pay attention to the weather - but we invest in wonderful companies capable of completing the journey.
With warm regards,
Unicorn InvesCo
