Interest Rates as the Tide Beneath Assets

Interest rates rarely attract sustained attention. They move slowly, change infrequently, and are easy to ignore during periods of market excitement.

Yet they sit beneath every asset price.

While narratives come and go, and individual securities rise and fall, the level of interest rates quietly shapes what investors are willing to pay for future cash flows. When rates change, the entire pricing landscape adjusts with them.

The Price of Money

An interest rate is the price of money over time.

It represents the return an investor can earn by delaying consumption without taking business risk. Government bond yields, imperfect as they are, serve as the baseline for this trade-off.

Every other asset competes with that baseline.

Equities, property, credit, and alternatives are all priced relative to what can be earned without bearing operating or credit risk. The higher the return available on safe assets, the more demanding investors become elsewhere.

This relationship is structural rather than emotional.

Discounting and Duration

Asset prices reflect expectations about future cash flows discounted back to the present.

When rates are low, distant cash flows are discounted less heavily. Assets with long duration - those whose value lies far in the future - become more valuable. Growth assets benefit disproportionately.

When rates rise, the opposite occurs. Future cash flows are worth less in today’s terms. Duration becomes a liability rather than an advantage.

This repricing does not require changes in business fundamentals. It follows mechanically from the mathematics of discounting.

Why Rates Matter Even When Nothing Else Changes

Markets often react to rate changes as if they were commentary on growth or inflation. Sometimes they are. Often they are not.

Even in the absence of new information about businesses, a change in the risk-free rate alters the opportunity cost of capital. What looked acceptable yesterday may look expensive today.

This is why broad asset repricing can occur without any single catalyst. The tide moves, and everything floating on it adjusts.

The Illusion of Stability

Extended periods of low rates can create a sense of normality.

Low discount rates support higher valuations. They reduce the apparent cost of leverage. They make distant outcomes feel closer and more certain.

Over time, this environment encourages assumptions that depend on rates staying low indefinitely. Business models become more sensitive to financing conditions. Investors become accustomed to paying up for duration.

The risk is not that low rates are unsustainable. It is that reliance on them becomes invisible.

When the tide eventually shifts, assets that appeared stable can reprice abruptly.

Rates and Judgment

Interest rates do not tell investors what to buy or sell. They provide context.

Ignoring rates entirely leads to valuation errors. Obsessing over them leads to false precision and premature positioning.

The challenge is to recognise how sensitive an investment is to the level of rates and whether that sensitivity is already reflected in the price.

This is especially important for assets whose value depends heavily on assumptions far into the future.

Why This Is Foundational

Rates influence valuation, risk-taking, leverage, and capital allocation decisions across the market.

They affect not only prices, but behaviour. When the cost of capital is low, standards loosen. When it rises, discipline returns.

Understanding this dynamic does not require predicting the path of rates. It requires recognising that the price of money is never neutral.

What This Implies

Interest rates operate quietly in the background, but their effects are pervasive.

They shape what investors demand, what businesses pursue, and what kinds of risk appear tolerable. They raise and lower the waterline beneath all assets.

Seeing rates as the tide rather than a forecast variable helps keep them in perspective.

They do not determine outcomes on their own. But they set the conditions under which all other outcomes occur.