Factors & Interest Rates

Fear Not the Rates…

July 2017. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • There are no consistent relationships between Value, Size, Momentum and interest rates
  • Applies to high and low and increasing and decreasing rate environments
  • Investors shouldn’t be too concerned about factor exposure and rising rates, more about very low rates


The direction of the S&P 500 and interest rates are likely the two most discussed topics in finance as trillions of dollars depend on their movements. Most people have some money in stocks, so can relate to the market ups and downs. The daily changes in interest rates are somewhat more abstract, although they affect anyone with a mortgage, consumer loan, or savings account. When it comes to factor investing market participants often question the impact of interest rates. In this short research note we will analyse the Value, Size, and Momentum factors and interest rates. Specifically, we will review how the factors perform in high and low and rising and decreasing interest rate environments (try Finominal’s Inflation Hedger to analyze your inflation exposure).


We will focus on the US equity market as it has the longest data series of high quality factor data available. We use factor data from Fama-French, where we build long and short portfolios based on the top and bottom 10%, and 10-year US interest rate data from FRED, which is available since 1962. The period is sufficient as it contains a complete cycle of rising and decreasing interest rates.


The chart below shows the performance of the Value factor (long / short) in the US in four different interest rate periods, which are categorised into extreme low, normal low, normal high, and extreme high interest rate environments. Market participants might consider Value as a risk-on strategy as buying cheap, risky stocks is done with more confidence in a low risk environment, where the economy shows strong growth and interest rates are more likely high than low as central bankers would have increased these to keep inflation in check. The analysis confirms this to a degree as Value does not perform well in an environment of extreme low rates, which tends to be a result of low