The reason issuing bonds or corporate bonds can lead to higher interest rates is that an increase in the supply of bonds on the market causes bond prices to fall, which in turn can cause yields (interest rates) to rise.
However, not all bond issuances trigger interest rate hikes. It depends on the issuing entity and market conditions.
Since this also relates to stock investment, I will explain the mechanism.
1. First of all, why does issuing bonds cause interest rates to rise?
Let’s consider government bonds as an example.
Suppose the government issues a large amount of government bonds to raise funds.
In the market, there is a limit to the money investors have to buy government bonds.
When the supply of government bonds increases, a more favorable yield may be required to get investors to buy them.
As a result, the following sequence occurs.
Increase in government bond issuance
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Increase in the supply of government bonds on the market
↓
Prices fall to get people to buy the bonds
↓
Government bond yields rise
What is important here is that the “price” and “yield” of a bond move in opposite directions.
2. Why does the interest rate rise when bond prices fall?
Let’s think about it with a concrete example.
Suppose the government issues a government bond with a face value of 1 million yen and an annual interest payment of 10,000 yen.
The interest on this bond is fixed at 10,000 yen per year at the time of issuance.
Case 1: Purchased for 1 million yen
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Purchase price: 1 million yen
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Annual interest: 10,000 yen
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Yield: 1%
Case 2: When the price falls to 900,000 yen on the market
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Purchase price: 900,000 yen
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Annual interest: 10,000 yen
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Yield: approximately 1.11%
Since the purchase price dropped to 900,000 yen while you can still receive the same 10,000 yen in interest, the yield rises to approximately 1.11%.
In other words,
when bond prices fall, the return on investment increases even with the same interest, which causes the yield to rise.
*This is a simple yield calculated by dividing the annual interest by the purchase price. The actual final yield of a bond is calculated by also taking into account gains or losses on redemption at maturity.
3. The mechanism for interest rate hikes differs slightly between government bonds and corporate bonds
This is important.
1. When a large amount of government bonds are issued
When the government issues a large amount of government bonds to increase fiscal spending, the supply of government bonds in the market increases.
If investor demand remains the same, government bond prices may fall and long-term interest rates may rise.
Furthermore, the following factors also lead to interest rate hikes:
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Fiscal deficits expand, and future government bond issuance is expected to increase.
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Inflation progresses, and there are concerns about a future decline in purchasing power.
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Investors demand higher yields to absorb the increase in the supply of government bonds.
In short, government bond issuance affects interest rates not only through supply and demand, but also through the market’s view on fiscal policy and inflation.
However, if the central bank’s monetary policy or investor demand is strong, interest rates may not rise even if the issuance of government bonds increases.
2. When a company issues a large amount of corporate bonds
When a company issues corporate bonds, the basic mechanism is the same.
However, corporate bonds have different characteristics from government bonds.
Corporate bond yields are generally determined by the following two factors.
Corporate bond yield ≒ Government bond yield + Credit spread
A credit spread is the additional yield added on top of government bonds to account for factors such as the risk of corporate bankruptcy.
For example, consider the following situation.
Item Before Issuance After Issuance Government Bond Yield 2.0% 2.0% Credit Spread 0.5% 0.8% Corporate Bond Yield 2.5% 2.8%
If a company issues a large amount of corporate bonds and investors become wary of the increased supply or credit risk, the credit spread may widen.
In that case, even if the government bond yield remains unchanged, the corporate bond yield will rise.
However, for corporate bonds from financially sound companies, demand is strong, and the yield may hardly rise even after issuance.
4. So, why do stock prices fall when interest rates rise?
This is where it becomes an important point for stock investment.
There are three main reasons why rising interest rates affect stock prices.
1. The relative attractiveness of stocks decreases
For example, suppose the yield on government bonds rises from 1% to 3%.
Investors might find it more attractive to earn a stable yield from government bonds rather than investing in stocks that carry the risk of price declines.
As a result, funds may shift from stocks to bonds.
2. The value of future profits decreases
What is particularly important is the impact on growth stocks.
There is a concept that stock prices are evaluated by converting the profits a company will generate in the future into their present value.
In this case, when interest rates rise, the discount rate used to convert future profits into present value also rises, making the theoretical value of the stock more likely to decline.
For example, for AI-related companies expected to generate large profits in 10 years, the stock price heavily reflects expectations for future earnings.
Therefore, their valuations tend to be easily lowered by rising interest rates.
On the other hand, companies that are already earning large profits today may be less affected by rising interest rates because their reliance on future earnings is relatively lower.
3. Corporate financing costs increase
When interest rates rise, the cost for companies to borrow new funds or issue corporate bonds may increase.
In particular, companies with high levels of debt or those planning large-scale capital investments need to be cautious.
If financing costs rise, future profits may be squeezed.
5. Finally, one thing I want you to remember
Bond issuance raises interest rates not because the issuance itself directly determines the rate, but because the supply and demand for bonds and the required yields of investors change.
Also, bond issuance includes government bonds issued by the government and corporate bonds issued by companies.
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Large-scale issuance of government bonds: May affect the supply and demand of the entire government bond market and long-term interest rates.
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Large-scale issuance of corporate bonds: In addition to government bond yields, it may affect corporate bond yields, which reflect the company’s credit risk.
In stock investing, it is important to take it a step further and consider “why are interest rates rising?” and “how long is the interest rate hike likely to continue?”
Even with the same interest rate hike, the impact on stocks varies greatly depending on the background.