Interest rates explained: policy rates, bond yields and markets

An interest rate is the cost of borrowing money, or the reward for lending it, expressed as a percentage per year. Every loan, deposit and bond carries one, and they are linked: when the rate on safe government debt changes, mortgages, business loans, deposit rates and even stock and currency values adjust with it.

At the centre sits the central bank's policy rate: the federal funds target range set by the US Federal Reserve, the deposit facility rate of the European Central Bank and, in Türkiye, the one-week repo rate set by the central bank's Monetary Policy Committee. Central banks raise rates to cool inflation and cut them to support growth.

Most valuation comes down to discounting future cash at an interest rate. The higher the rate, the less a future payment is worth today:

Present value = future cash ÷ (1 + r)^t
Real rate     ≈ (1 + nominal rate) ÷ (1 + inflation) − 1

100 received in ten years is worth about 74 today at a 3% rate, but only about 56 at 6%. That is why rising rates hit long-duration assets hardest — long-term bonds, and growth stocks whose profits lie far in the future — and why markets react so strongly to central-bank decisions.

A 10-year bond pays a 5% coupon and trades at 100, so it yields 5%. If market rates rise to 6%, nobody will pay 100 for a 5% coupon any more: the price falls to about 92.6, the level at which its payments yield 6% to a new buyer. If rates fall to 4%, the price rises above 100. Prices and yields always move in opposite directions, and the longer the bond, the bigger the move.

The 10-year US Treasury yield, which you can follow on the site, is the world's benchmark long-term rate: it feeds into mortgage rates, corporate borrowing costs and the valuation of stocks everywhere.

A high nominal rate is not necessarily a high real rate. A 45% deposit rate with 40% inflation is a real return of only about 3.6% before tax — and negative if inflation runs higher. Always compare rates with expected inflation and with the likely path of the currency.

The carry trade — borrowing in a low-rate currency to invest in a high-rate one — can pay for long stretches, but a sudden currency move can wipe out years of interest in days. And rate decisions are often priced in before they happen: markets react to the surprise, not to the decision itself.