Last month, the Federal Reserve (FED) raised interest rates by a quarter of a percentage point pushing it to a target range of 3.75%-4.0%. Experts are anticipating at least another quarter point hike before the end of the year. The rising interest rates are meant to slow the economic growth that is driving inflation. However, slow economic growth historically works against for profit companies, causing many investors to remain sidelined in these uncertain economic times. 

According to Merriam - Webster, inflation is defined as “a continual rise in the general price level of goods and services.”  This is usually attributed to an increase in the volume of money and credit relative to available goods and services. In July 2022, the inflation rate in the U.S. was 8.5%. That means that the costs of goods rose by an average of 8.5% year- over-year. One of the  Fed’s primary functions is to maintain a low inflation rate and unemployment rate in the U.S. which it does by controlling interest rates or the federal funds rate. By increasing the federal funds rate, the Fed makes it more expensive for banks, and therefore consumers and businesses, to borrow money.   Businesses may pull back on borrowing and investing, which means consumers and businesses would start spending less and eventually bring demand back down to a level that’s commensurate with supply. When consumers spend less, businesses tend to produce less.  This typically results in businesses hiring less or laying off employees, which could lead to a recession. 

One of the major markets affected by the rising rates is the housing market. Higher interest rates make borrowing costs more expensive. A quarter point increase in interest rates typically raises monthly mortgage payments and increases the total interest paid over the life of the loan. A quarter point will increase your monthly mortgage payment by $17 per $100,000 borrowed every month. So if you borrow $500,000.00 to buy a home, (multiply 17x5), your monthly mortgage payment will increase by $85 each month for a quarter point interest rate increase. That equates to $1020.00 increased interest paid over a year. The increase in payment makes home buying difficult especially to individuals working within a specific budget, making investing in homes less attractive. 

Government bonds, also known as Treasury Bonds, or T-bonds, are issued and backed by the Federal government. When an individual buys a bond, they are essentially loaning money to the U.S. Department of Treasury. Repayment of the bond is made with interest, and paid out every six months, until the bond matures. 

Interest rates can impact the bond market. Rising interest rates offer investors the chance to earn higher yields on fixed income investments. Bond prices have an inverse relationship with interest rates. When interest rates increase, the prices of existing bonds drop. This can negatively affect existing bondholder’s portfolios.  Longer term bonds are more significantly impacted by interest rates. 

Bonds with a longer duration pay a fixed amount of interest regardless of ongoing market trends. Therefore, when interest rates increase, these bonds can decrease in value more sharply. Shorter-term bonds that are maturing sooner experience less price volatility as interest rates fluctuate. Conversely, if interest rates fall, longer-term bonds tend to be much more appealing and can increase in value more significantly than shorter-term bonds.

It is always possible to lose money when investing, but the chance of that happening with a government bond is close to zero. Historically, the U.S. has an excellent record of repaying bonds. However, since the risk in bond investment is low, so is the payout. Returns on government bonds tend to be lower when compared to stocks, exchange traded funds (ETF’s) and mutual funds. Over the past century, returns on the stock market have averaged about 10%. As of August 2026, interest rates on a 20 or 30 year Treasury bond is 5%. Bottom line, no investment is ever 100% risk-free, but government bonds are about as safe as it gets. They're backed by the full faith of the U.S. government. Gains tend to lag behind riskier investment, but government bonds can help diversify your portfolio and provide reliable returns.

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